Donna Genie walks through how to employ your kids at your PYOP studio for tax breaks. Children as young as 7 can work, and you can pay them up to the standard deduction ($12,950) tax-free, then funnel $6,000 into a traditional IRA to cut your own taxable income further.
Questions this video answers
Age 7 through 18 (speaker also mentions "age 7 or older" generally).
$12,950.
$6,000 to a traditional IRA (bringing total to $18,950 gross before the IRA deduction).
Traditional IRA (speaker explicitly says not a Roth IRA).
15.3%.
Chapters
We all know that kids cost a lot of money, but there is one way where they can help you save some money and that is by using the tax strategy to hire your child to work in your studio. If your child is age 7 or older, you can you can add them as an employee in your studio. If your child is age 7 through 18, you can probably employ them through your business and reap some tax benefits. Let's talk about sole proprietorships and partnerships. This business entity offers the best benefit for employing children and you can pay your child up to the standard deduction allowable, which is currently $12,950 each for services performed in the business. You will have to give them a W2, but they won't have to pay any Social Security or Medicare taxes and your child will not have any income taxes as well, assuming they have no other sources of income. If you'd like to go one step further, you can also add $6,000 to that, make it a total of $18,950 and allow your child to fully fund $6,000 and into a traditional IRA that will bring their taxable income back down to the $12,950 with no tax consequences. The $6,000 can grow for college purposes or retirement for your child. Remember, that was a traditional ira, not a Roth ira. If you have an S Corp or a C Corp, you can also utilize this strategy, but you will have to pay Social Security and Medicare taxes. The Social Security and Medicare taxes amount to 15.3%, so if the parent tax rate is higher than that, it still makes good sense. If you as the parent pay in the 30% range in taxes, you can still save 15%. The maximum that you can pay them is still the standard deduction limit without having any tax consequences. Again, this also assumes the child has no other income. The magic of compounding dollars can help that money really grow while your child is still young. If you have a child who's getting ready to go off to college, you may want to review how this affects your application for financial aid. It may have some consequences for juniors and seniors in high school, but this can still be a wonderful tax strategy to implement to help you save money. Once your child reaches the age of 18, you're probably done with this strategy, but that's where you need to look into your specific tax situation to determine if there's still any benefit. Please follow us on Facebook and Instagram. Please make sure to check out our blog and our website linked below. Subscribe to our YouTube channel and hit the bell to be notified when we post. You can email me@donnapyaccounting.com.
