Here’s What You Need to Know Before Hiring Your Child Tax-Free

So far you’ve learned how to pay your children to work in your business tax-free

… and even a legal workaround to avoid payroll taxes for your kids if your main business is a corporation.

The future looks bright: your kids are earning $12,000 per year tax-free and can help pay for their own expenses where appropriate, save for college and even pay their own way on family vacations.

Plus — all the while they’re developing a strong work ethic, discovering entrepreneurship and learning the value of money.

But a few questions have come up, so we’re going to answer them right here, right now:

What About the “Kiddie Tax?”

Some business owners have asked us: “What about the ‘kiddie tax’? Aren’t the kids going to end up paying taxes on their income at our rates anyway?”

The answer is no. The IRS does have a kiddie tax rule that taxes children at their parents’ marginal tax rate. But it only applies to unearned or “portfolio” income — and if the children are working in the business, then it’s clearly “earned” income.

What about Children Over the Age of 18?

Another question we’ve been getting is how this strategy works with children over age 18.

If you are paying children (or grandchildren) over the age of 18, the child can still earn up to $12,000 before they owe any income tax. That’s because of the IRS’s standard deduction that everyone gets.

But your child will still owe payroll taxes — that exemption expires when they turn 18.

Also, as an adult, your child legally gets to decide what they spend their money on, so you have lost some control. However, you can still make a deal with your child for them to help pay the family’s bills — especially if they’re still living at home.

Notice that this strategy can also apply to hiring your parents, not just your children. For example, if one or both of your parents moves in with you later in life, they can also earn up to $12,000 before they owe any income taxes — and can also contribute to the family bills if they choose.

What About Using the Money to Save For Your Kid’s College?

Some of our readers have been quick to point out that a child’s income can be put into a qualified plan like an IRA, a Coverdell Education Savings Account or a 529 plan.

And it is true. Since your kids now have “earned” income, they can legally contribute to a Roth or Standard IRA.

Be careful before you jump onto this bandwagon, though. All qualified plans, including the educational varieties, have limitations, rules and features that can make them a less than ideal way to save for your child’s education.

Note: If you haven’t yet read the New York Times bestselling book, Killing Sacred Cows, we highly recommend it.

It’s co-written by Garrett Gunderson, the Chief Wealth Architect here at Wealth Factory. And in the book, he gives numerous compelling reasons to avoid qualified plans completely.

The book is required reading for all top level clients we work with, and if you’re reading this because you’re on our email list, we’re going to send you a free chapter of the book very soon.

If you absolutely feel you must put your child’s income into an IRA, our savviest clients elect for a Roth IRA. At least that way they can pull out any contributions made before retirement without penalty, whether or not it’s for college or anything else they want the money for.

It makes no sense to use a regular IRA, though. Why defer paying tax when they’re in a 0% bracket now? They will be in some higher tax bracket as an adult, and then they’ll have to pay taxes on the contributions and any earnings.

One final option that may make sense is to establish a Cash Flow Banking system for each child. There are no restrictions on how much can be put in or how much you can access.

The entire amount will have tax-preferred treatment with no fear of losing money to the stock market (money saved in a Cash Flow Banking system is guaranteed not to lose value).

Plus, the money you take out can be used for any purpose. It can be used for college or after college to finance larger purchases like cars, starting a business or saving for retirement.

We have plenty more to say about Cash Flow Banking, but that’s for another time.

For now, take another look at “32 Jobs Your Child Can Perform in Your Business” and see if there’s a way that you can implement this strategy as soon as possible. (Get the guide here if you don’t already have it.)

And remember, if you’re on our email list we’ll be sending you a free chapter from our NY Times bestselling book, Killing Sacred Cows, very soon. Be on the lookout.

Don’t have our free guide, yet?

Click here to download “32 Jobs Your Child Can Perform in Your Business for Tax-Free Income” and get our daily newsletter.

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