Is Child Labor Legal? - Putting Your Kids on Payroll

Hey, Mark Kohler here and I got an important topic to talk about. Do you have children? Do you own a small business? Do you think you can integrate the two of those and save a ton in taxes and maybe teach your kids about entrepreneurship at the same time? Well, we got to talk about putting your kids on payroll. I got my whiteboard here. We're gonna break it down and you're gonna love it. Now, before I go to the whiteboard, let me make a few important points. First, this is legitimate. It's legitimate if you truly have job duties for your children and they are participating in the business, not just washing dishes and cleaning the room. And that you could document things like janitorial, shredding paper, stuffing envelopes, helping at the work site, even, you know, just running errands. So this is very important tax strategy if you treat it legitimately. I don't want this to be some sort of tax scam or sham. Now this has been on the books for years. This is a very common strategy. Think of the New York City deli paying their kids, working behind the counter even 80 years ago. Or in the Oklahoma City farm, paying their kids on the farm in the summer. And this could be you and your real estate or Internet business help having your kids help you around the office. So make sure you have clear duties, legitimate services your kids are providing and paying them a fair amount. Which is another topic, which I want to get out of the way, is that you're not going to pay a five year old, you know, several thousand dollars to help in the business. Maybe it's $100 a month to a six or seven year old to empty trash and shred paper or something like that. The older they get, the more you can pay them. And I have teenagers that can make $10,000 or more helping in a business in the summer throughout the year. So you want to think about their duties and how much you're paying them before you start going through the procedures. All right, let's go to the whiteboard. Now, this is a huge topic and I'm just going to hit the highlights. I've got more in depth videos on my website and my tax and legal library where I go through all sorts of strategies, whether it's auto or health care, dining and home office, and paying kids over age 18, 20, 30 minute videos where I go in depth. Very affordable and it'll save you thousands. So if you want more, just click down below and check it out. Now, also in 2018, the rules changed because of the standard deduction amount now, this is important for those that have watched my videos before, there's a new rule for 2018 that we're going to play into this. Now, again, under age 18, not the symbol here of 18 or under, it's 17 or under. Under age 18, right. Symbol. Correct. Now, there's three ways to pull this off. Again, generally, you have your sole proprietorship or llc. You might have an LLC over here holding real estate. Again, in all my diagrams in videos, you'll see operations are over here, holdings are over here. So for some of you that have a day job and just rental property, you might pay the kids directly out of an LLC that holds your rentals. For those that have just kind of a small business on the side, you may pay your kids directly out of a sole proprietorship. Going to call it outside labor. You're not going to give them a W2. You're not going to give them a 1099. That'll screw it up and cause problems with the IRS. The reason why you don't have to issue a W2 is because you're not withholding Suda, Fuda, Fica. So there's no employment taxes to withhold. And the penalty for not issuing a W2 is a proportion of the taxes that were to be withheld. Well, there are no taxes to be withheld. So you accountants out there that think, oh, circularly, you got to issue a W2, no, it's fine. And I've had, we've been doing this for 15 years, and I've had conversations with countless IRS agents in all sorts of scenarios where they're like, oh, you're paying the kids outside labor under age 18. Done. So if they're your children under age 18, there's no W2, no 1099, just outside labor. Now, for those of you that have an S corporation, which is where most of my clients are, because of the salary FICA savings here, you're not going to pay your kids directly out of an S corp. This is where we start to use what I call the family management company, just kind of a support company that's a sole proprietorship. And you would pay a management fee down here. And just online transfers are fine. Theoretically, you're 1099 in a little sole proprietorship that's going to provide janitorial, marketing and office support. And then this is where you pay the kids. So if my daughter Molly, who's 15, says, Dad, I need a hundred dollars to go pay for soccer this summer, then I'm not going to pay for soccer. I Going to transfer money down here and let her pay for soccer. See, the whole goal here is quit paying taxes and then giving money to your kids and helping them at any age. Put them on the payroll and let them pay for their own expenses. You don't have to be rich to do this. Just change the way you're transferring money to your kids. I take two steps to get down to Molly's personal debit card. All the kids need their own bank accounts and debit cards. These are your kids again, under age 18. Watch my other video on 18 and over. And we're going to pay the kids through a two step process. We pay the sole proprietorship and then do an online transfer to their account here. Now, here's where the rules changed in 2018. Previously, we would tell clients, don't pay your kids more than $6,000. You might start at $100 a month or a thousand a year for your six or seven year olds. And then as they go through junior high and high school, you might pay them closer to $500 a month or more as they help in the business after school and in the summers. So a total of maybe $6,000 because that's their standard deduction. And they don't even have to file a tax return if you pay them less than the standard deduction. See that? Did you catch that? You get our tax write off, you don't withhold any payroll taxes and your kids don't even file a tax return if it's under six grand. That was the old rule. Well, now the standard deduction is $12,000. Now for those of you that have teenagers that are providing legitimate services that could get paid more than $6,000, remember, you got to be able to substantiate that. You could literally pay your kids up to $12,000. You got three teenagers, what that's like $36,000 as a tax write off to pay them for helping in the business. And then they're going to pay for their own school clothes, school lunch or college savings. Now, last point, because again, I'm just hitting highlights is could the kids then, if they have earned income, fund an ira, a Roth ira, a traditional ira? Absolutely. So now the kids are funding their own retirement account with earned income that you got a tax deduction to give them for. And then they get to be a partner in your next LLC with their self directed ira. Whoa. Did you catch that? You get a tax write off to pay your kids for money you were going to give them anyway. And then you could take a portion of that fund an ira and then their IRA could be a partner in your next project. Watch my videos on self directed IRAs and LLCs. So this just blows up. It's so amazing. It blows up in a good way because you can get your kids involved in your business, teach entrepreneurship, get good tax write offs, build wealth for college or retirement, and just really change the lives of your family in a dynamic way. In summary, do not discount this strategy. If your accountant isn't talking about getting your kids on payroll, you got the wrong account. Understand the rules. Please study the videos on my website, my blog, my books. I've got more content on this than you can absorb in even just an hour or two. You're gonna love it and it's gonna help you save thousands of dollars and better live your American dream. Thanks so much for watching that video and I want to be your source for tax and legal strategies. It's hard enough to live the American dream without being out on the web on Google trying to find answers to complex questions and just clicking a mouse or hoping you got it right. My team and I want to be a huge resource to you at the law firm, accounting firm, my education resources on my site. Please continue to follow these strategies. I know they'll save you thousands. Now click here if you want to be a part of my newsletter. It's awesome. Weekly updates and deadlines and strategies and tips. Also subscribe to my YouTube channel. You'll love it. And make sure to click the bell icon so you get a little ping whenever there's a new video. And finally, check out my son site margincoller.com with all sorts of videos, probably 70 plus videos, 30 plus hours of content that'll save you thousands of.