The Benefits of Employing Your Children
The Benefits of Employing Your Children
by Collin Almeida
How many times a week do you hear, "Mom, I need a new pair of
shoes!" or "Dad, can I have money to go to a movie?" Not to
mention the cost of school supplies, braces, and college tuition
that haunt every parent. If you're like the average parent, you
probably spend several thousand dollars a year providing for all
the needs and wants of your children. But unlike most Americans,
if you are a home-based business owner, you can make those
thousands work for you.
The IRS allows you to hire your school-age children as part-
time employees for your business. Then, you pay them a
reasonable salary for their work that is then used to cover all
their expenses. And their salary is completely tax deductible.
Plus, as employees, their medical expenses can also count as tax
deductions.
For example, if you have two children, one age 10 and another
age 17, you can officially and legally hire them to work for
you. Perhaps the ten year old can clean up your home office or
sort mail while the older child could answer phones, handle
filing, or type correspondence. No matter what responsibilities
you elect for your offspring, make sure to prepare a formal
employment agreement between you, as business owner, and your
child. Make sure your agreement includes a list of duties, the
compensation arrangement, and any special details you want to
have in writing. In addition to the official agreement, you can
create a job title and description for your new "employee". Not
only will this help to audit-proof the deduction, it will also
clearly spell out for your child what his or her
responsibilities are.
There are some restrictions, however. For instance, the child's
yearly income (according to 2001 tax regulations) can be no more
than $4550. Additionally, the pay rate must be comparable to
similar services offered by professionals. If you are paying
your child for vacuuming or dusting, you should contact cleaning
services in your area for a written estimate and base his or her
wage accordingly. Also, the child must maintain a record of his
or her work. The log must include the date, type of work, time
worked, and hourly rate. The last restriction is that the child
must be paid what he or she earns. So you will need to open
separate checking accounts for the children in which to deposit
their salaries. All the expenses then can be covered from that
account, including entertainment, clothes, school expenses, or
even a car or college tuition.
The IRS also allows all medical benefits provided by a business
to its employees to be claimed as tax deductions, so if your
child is your employee and you have to pay for his or her braces
that hefty expenses can be completely tax deductible. Even if
your child is covered by your spouse's insurance plan, you can
claim all co-payments or non- covered medical charges. There are
no minimum or maximum levels either: every dollar you pay out
can be counted as a tax deduction. However, your policy for
covering these expenses must be in writing and copies of all
receipts and bills should be maintained for your business
records.
Besides the obvious benefits of being able to write-off these
costs, hiring your child as an employee can have other positive
effects. You will save time because of the additional help your
new staff will provide. While they handle the menial duties, you
can concentrate on running a successful business and earning
more money. And with your children on the staff and on the
payroll, they - and your spouse - will be more likely to support
your venture. There's also no better way to teach your children
the value of money than by having them work for it and get Uncle
Sam to pay for it.
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