It is quite common to see children actively involved in the family business. Even young children can perform valuable services. Many business owners, however, miss out on the major tax savings generated by actually hiring their children and paying them a fair wage for their services.

The expense is tax-deductible to you, and the income is tax-free to them. [Reg Sec 1.162-7(a) ] The tax-free limit for dependent children was $5,350 per child per year for 2007, and it tends to be increased somewhat each year. The amount is equal to the Standard Deduction.

[Rev. Proc. 95-53 and IRC Section § 63(h)(2) ]

In order to qualify, the wages must be reasonable in amount, based on services actually rendered and documented as paid. Children as young as seven years old have been found to qualify as employees of the parents’ business. [Reference Eller v. Commissioner, 77 T.C. 934 (1981) ]

And if they are family members under 18 working for a sole proprietorship, they are exempt from payroll taxes [IRC Section § 3121(b)(3)(A) and § 3306(c)(5) ] and the business is not required to withhold or to pay Social Security and Medicare taxes. [Tax Court Ruling 48 TC 439, 450 (196) in the case of Denman v. IRS Commissioner]

For incorporated business owners, your corporation will have to pay payroll tax and you do need to withhold social security/medicare from the children’s wages, but the benefits are still well worth it.

In order to qualify, the wage rate has to be “reasonable and customary” within your region of the country and within your industry for the type of work being performed. These wages must be paid and the appropriate payroll tax returns and W-2 forms filed with the IRS and Social Security Administration. Before hiring your children, check with your tax pro to be sure your documentation and reporting will follow the rules. [Revenue Ruling 73-393]

The kids (as employees) should document what they did to earn the money, [Revenue Ruling 73-393] so have them fill out a simple “work log” with headings like:
o Date they worked
o Type of work performed
o Amount of time spent working
o Hourly rate you paid them

** Pay Attention Here **
We’re about to show you how to pay for…
o The car your high-schooler wants
o Designer-label clothes the kids demand
o Movie and Concert tickets
o A High School graduation trip
o College tuition, books and supplies
o Your daughter’s expensive wedding
o And lots of other personal out-of-pocket expenses

ALL in PRE-TAX Dollars!

Here’s how you can do this…

The tax-deductible $5,350/year Uncle Sam lets you pay your children as employees, is equivalent to about $100.00 per week! But, you say, “Who gives their kids a $100.00 per week allowance?” YOU might now! And here’s why…

Let’s say you come up with the tax-free limit of about $100.00 per week worth of business related “chores” for them to do. After they turn in their “work log”, you then pay them by check. So, you’ll have to open a separate checking account for them to deposit and cash payroll checks. Of course, you will deposit every week’s $100.00 paycheck into that account. Make sure it’s an interest-bearing account. (You will see why in a minute.)

The bank will require it to be a “joint account” with you, since they are minors. Although it is technically a “joint” account, only you will be authorized to make withdrawals or to write checks on that account, since the child is a minor.

Reader Alert! Here is Where It Gets REALLY Interesting…

The law requires you to pay them the wage they earned, in order for you to be able to deduct the amount as a business expense.

These funds can now be used in a variety of ways so long as they are for the benefit of your child. The only other specific restriction is that this money cannot be used for your child’s lodging or meals. [Rev. Rule 73-393]

So, you simply tell your child, “I will withdraw $10 (for example) out of each week’s pay for you to spend any way you wish, however, the other $90.00 will stay in the (interest-bearing) account to be used by you to pay for your________.”

Fill in the blank with words like car, graduation trip, wedding, or whatever you like.

Did you ever, in your wildest dreams, anticipate that you would be able to pay for school supplies and tennis shoes, or pay for cars, trips, and weddings out of pre-tax dollars? It’s true! It’s real! And it’s 100% legal!

There’s another practical benefit to this strategy that is at least as important as the tax benefits. Your child/children will begin learning the value of a dollar. Imagine being at the mall to buy a new pair of shoes. The child has to decide whether he or she wants the $150 designer-label brand or the $45 generic brand – knowing that whatever they have left in their checking/savings account will be theirs someday, to pay for their car, trip, college, wedding, etc.

Isn’t that a great tax-savings strategy and a great learning opportunity for your children?

Next – Hire Your SPOUSE, So You Can Write Off Medical “Out-of-Pocket” Expenses for YOURSELF!

This applies to sole proprietor entities only. When your spouse is an employee of your home-business, he/she is eligible for “benefits” from his/her employer (that’s you), and those benefits are deductible as business expenses. [IRC Section § 162(a)]

So you establish this benefit as company policy: Any and all employees and their family members (again, that includes YOU) will be reimbursed (by the home-business) for all medical-related expenses not covered under any other insurance plan he/she may have under another employer.

“Any and all employees” means your spouse and your children, “and all members of their family” includes YOU.

A Word of Caution: Only establish this company policy if your business will be hiring only your own family members. If you establish this policy and then hire non-family members, you will be required to offer this benefit to them as well, and that could defeat the purpose.

So What Just Happened?
You just set into place a strategy for legally tax-deducting all annual insurance plan deductibles, co-pays for doctor visits, prescription drugs, and non-covered expenses like braces, glasses, contact lenses, dental work, and possibly even cosmetic surgery. [Reg Sec 71-588; Plr. 9409006]

No minimum thresholds apply; every single dollar is tax-deductible by the business as an employee benefit cost.

It is important that this “policy” be established in writing, as a legal document and that the benefit is reasonable in relation to the level of services provided by the employee to your business. In Appendix C to this system you will find a sample fill-in-the-blanks “Self-Insured Medical Reimbursement Plan”, which you may feel free to adopt or adapt, if you wish. [Reg Sec 1.105-5(a)]

A Word About the Level of Your Spouse’s Wages

A sole practitioner (Schedule C taxpayer) is not required to pay Unemployment Taxes on the employment of a spouse; however the business is required to pay Social Security and Medicare payroll taxes on adult family-member employees.

Since those taxes are calculated based on a percentage of the employee’s wages, the lower the wage level, the lower the payroll taxes will be. Even if you employ your spouse at “minimum wage”, you qualify to use this medical expense reimbursement tax strategy, so long as this benefit is reasonable in relation to the level of services provided by your spouse. [IRC Section § 3306(c)(5); IRS Publication 15, and IRS Circular E all apply]

URL: http://www.recordsinorder.com/
Scott C Turner, CPA Mission, Path and Today’s Focus

Life Mission: His mission has always been to find a better, more affordable method for the average to above-average smaller business owner to successfully access a higher level of tax strategy service that formerly could only have been obtained by the wealthier and more-informed business owner.

The Path: He was aggressively recruited upon graduation in 1978 by each of the “Big-8″ accounting firms. He accepted an offer from Main LaFrentz, the ninth largest CPA firm worldwide at the time, an affiliate of KPMG, the largest international accounting firm, where he immediately specialized in small business taxation – a specialty in which he has remained focused to this day.

Scott Turner is the former Director of Tax Consultation Services for the nation’s second largest employee benefits provider, serving more than 10 million taxpayers. This service provided an in-depth view of individual and business questions faced by today’s smaller business owners.

Today’s Focus: Use the latest technological advances to relieve business owners in reporting their financial and tax data, to establish their best legal tax position, to implement the most updated and appropriate tax strategies, and to provide for them the information they need for management decisions.

He currently manages his firm in the SF Bay Area having represented thousands of small business clients; while staying focused on his specialty for over 25 years – Strategizing for Small Business to achieve their best overall tax results. Though the majority of the clientele he has served consists of average to above-average smaller business owners, other notables include several highly successful health professionals, multi-millionaire real estate investors, authors, and highly-regarded Silicon Valley business consultants.

With eagerness he looks forward to assisting in the success of his next small business client.

Article Source: http://EzineArticles.com/?expert=Scott_C_Turner

As a parent, I’m always looking for ways to teach my children life long lessons about money. One of the best teaching tools I have found is money! What I really like about money as a teaching tool is not only its effectiveness in teaching my children, but also its effectiveness in reducing my taxes!

In a recent article, I asked you to think about this question:

What Tasks Can Your Children Do For Your Business?

What tasks did you come up with? Here are some of the more common tasks:

- Filing
- Cleaning
- Answering phones
- Running errands
- Data entry
- Maintaining the company’s online presence
- Updating the company website
- Research

As you can see from this short list, the tasks can range from simple to complex depending on your child’s skill set. The more advanced your child’s skill set, the more your child can earn – keep reading to find out why this is a good thing!

- How To Legally Reduce Your Taxes By Hiring Your Children -

When your company pays your children, this is money that your company would usually:

Distribute or pay to you, or
Pay to another employee to do the tasks

If the money is distributed or paid to you, it is taxed at your individual tax rate. If the money is paid to another employee, then that money is leaving your family circle and can no longer work for you and your family.

Having your company hire your children keeps the money in your family and moves the income from your tax rate to your children’s tax rates.

Your children’s tax rates start at 0%. This means if you are in a 30% tax rate, then paying your children shifts income from your 30% tax rate to your children’s 0% tax rate and you reduce your taxes!

- Your Children’s Tax Rates -

The first $5,450 of earned income to each child is taxed at 0%. What happens if your children earn more than this amount? You may still save taxes because your children also have 10% and 15% tax brackets. This provides great opportunity to shift your income to a lower tax bracket!

What about payroll taxes?

Your business and your child may be responsible for payroll taxes, which total approximately 15%. Don’t forget to factor this in when you are calculating how much you save in taxes by hiring your children.

However, there are exceptions to this rule. These exceptions exempt some businesses from having to pay payroll taxes on wages paid to children of the owners. The rules are very specific to each situation so be sure to discuss this with your tax coach.

Getting your children in the game and on your payroll provides many opportunities to reduce your taxes. Even more exciting is what your children can do with this money to put their money to work.

Tom Wheelwright is not only the founder and CEO of Provision, but he is the creative force behind Provision Wealth Strategists. In addition to his management responsibilities, Tom likes to coach clients on wealth, business, and tax strategies. Along with his frequent seminars on these strategies, Tom is an adjunct professor in the Masters of Tax program at Arizona State University. For more information please visit http://www.provisionwealth.com

Article Source: http://EzineArticles.com/?expert=Thomas_Wheelwright

There are many ways your children can put their money to work. Here are two of those ways:

#1 Have Your Children Pay for Their Extras

One thing most parents agree on is that children can be expensive! All the extras add up – sports, lessons, toys, games, the latest gadgets. All parents know this list can go on and on. Rather than paying for your children’s extras with your after-tax dollars, have your children pay for their extras with their after-tax dollars. Your children’s after-tax dollars are much cheaper than yours – especially if they are in a 0% tax rate!

What I love about this strategy is it reduces my taxes AND gives my children real life experience with managing their own finances.

#2 Have Your Children Fund a Roth IRA

Typically children do not have IRAs because in order to make a contribution to an IRA, the IRA owner must have earned income. Since most children do not have earned income, an IRA is not an option.

When you have your business hire your children, not only do you have the opportunity to reduce your taxes, but you have also created the opportunity for your children to contribute to an IRA. Once your children have earned income, they are eligible to contribute to an IRA.

In most cases, I find that a Roth IRA is a better fit for children than a traditional IRA. One reason is because distributions from a Roth IRA are tax-free. In a traditional IRA, distributions are taxable income. This means that all the income earned in a Roth IRA will never be taxed! Of course, the rules of the Roth IRA must be followed to receive this treatment but I find that most of the time, the rules of the Roth IRA are easier to follow than those of a traditional IRA.

The power of time is huge in this strategy because even modest contributions to a Roth IRA at a young age can grow to a substantial balance by the time your children are even just middle aged! Add to that the tax-free nature of the Roth IRA and it’s easy to understand why this strategy can be so powerful for your children.

Another reason I like the Roth IRA for children is that there are several exceptions to the early withdrawal penalty (which can make Roth IRA earnings and contributions taxable). These exceptions provide opportunity for your children to take distributions without penalty long before they reach retirement age.

Tom Wheelwright is not only the founder and CEO of Provision, but he is the creative force behind Provision Wealth Strategists. In addition to his management responsibilities, Tom likes to coach clients on wealth, business, and tax strategies. Along with his frequent seminars on these strategies, Tom is an adjunct professor in the Masters of Tax program at Arizona State University. For more information, visit http://www.provisionwealth.com

Article Source: http://EzineArticles.com/?expert=Thomas_Wheelwright