Family business owners may be able to save on taxes this summer by hiring their children. Hiring a son or daughter allows the family to engage in “income shifting.” Income shifting in family businesses usually happens through paying wages. The wage money, which would ordinarily be taxed at the parents’ high marginal tax rates, is instead taxed at the child’s lower rates. However, be sure to evaluate whether additional payroll taxes incurred will offset or eliminate any income tax advantage available.
The family business may be able to generate more tax savings by having the child make a deductible IRA contribution. That contribution could offset up to $5,500 in taxable income for 2013. Similarly, effective use of education credits can also help minimize the family’s tax bill. If you decide to hire your child, remember that his or her wages will almost always be subject to withholding.
For additional information, view our full article on this topic.
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