Children on Payroll

March 5, 1991

            In the midst of tax season and while we all try to grasp the scope and significance of this business downturn we must also look ahead to basic business and tax planning.  In another return to the basics similar to my recent letter on the basics of borrowing I remind you of the importance of having your children on the company payroll.

            Let us say that your child was to receive a salary of forty dollars per week for the 10 or so hours he or she puts in doing labeling, envelope stuffing, tending the cash register, or operating your software programs.  That amounts to a tax free transfer of $2,080 per year from your tax bracket to your child’s.  The $2,080 is subtracted from the company’s income which is really what is available for your salary and bonus and is taxed at least 28% for federal purposes to your child’s where it is not taxed at all.  It isn’t taxed to the child because it is sheltered by the child’s standard deduction which is allowed as an offset to earned income up to a maximum of $2,340.

            The foregoing salary “could” then be banked in a bank account and over a period of time you have saved for the child’s education with pre-tax dollars ($2,080 x 10 years = $20,800 plus interest should equal at least $30,000).  The $2,080 per year really only costs you $1,400 since the rest would have gone to Uncle Sam (we haven’t touched on Uncle Mario, Uncle Jim and Uncle David).

            Additionally, the salary is not subject to OASDI and Medicare (the old Social Security and Self employment taxes) for children of the owner up to 18 years of age (a further savings of 15.3% or $300.

            Should you look to further shelter the income and I do not generally advise it an IRA could be set up for $2,000 per year.

            For more details as to how to set this up and on its applicability to you, please call me.