Sole Proprietor Tax Loophole

Submitted by taxman on July 21, 2006 - 9:56am.

I am going to get straight to the point on this one. Use your kids in your business and SAVE TAXES. You can employ your child in your business and if they are under the age of 18, or a full time student under 21, they are not subject to FICA or FUTA. Three test have to be met to take advantage of this tax break.

  1. The work must be performed in connection with the parent's trade or buisness. (Parent have a business).
  2. The child must actually render the service. (Put the kid to work)
  3. The payments must be made. (Write the Check)

This applies to sole proprietors and partnerships and their children. If the earnings are capped at the proper level then the child will not be required to file a federal return and pay taxes but the parent still gets to deduct the expense. Note that the maximum payment may be different at the state level of taxation.

Now I am going to add a wrinkle to this strategy for even greater tax savings. The threshold for earnings for your child is controlled by the standard deduction for federal taxes. So assuming that the standard deduction is $5000, that would be the cap that you could pay a dependent child tax free. But... Not so, sez the taxman! I can't believe I am putting this out for free! Your child can make a deductible IRA contribution of $3000 so that raises the cap to $8000. Just think about it Mr. Self Employed. You get to deduct $8000 before self employment tax and your child pays no federal taxes of any kind. Assuming a 28% bracket, a conservative bracket for business owners, your federal tax savings as a family would be $1920 plus $612 self employment tax. That is an excellent tax savings strategy. I GET FIRED UP ABOUT THIS KIND OF STUFF!!! YEA BABY!!!

Coming back to earth now! Whew. Here is one more wrinkle for you. Let's suppose that your child is 3 years old. Going back to our three rules, it is going to be hard to justify paying your 3 year old for doing work. The idea here is to give you strategies that will comply with the IRS code. We don't want you to go to jail, we want you to pay less income tax. STRATEGY TIME AGAIN! Everybody likes cute children. Wouldn't it be a great idea to use your children in your adverstising campaign. Well, doesn't your child deserve to be paid a royalty for their service and cuteness? BANG! FIRED UP AGAIN! Pay your child a royalty of up to $4000 and PROBLEM SOLVED! MAN THIS IS FUN!

I have given you some strategies here that will make a difference in your overall taxes. These are just some of the tax savings strategies that I have ready for you. The next step to start paying LESS TAX is yours. Contact Us

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