Five Tips to Minimize Your Family's Tax Burden

Author: Kristine McKinley

Source: ezinearticles.com



Parents: Did you know that you can hire your kids in your small business and reduce your taxes?

Hiring your children if you own your own business is a great tax planning strategy, but it's more than just a tax deduction. Here are a few ways, income tax bracket, you can save taxes by hiring your children in your small business:

1. You get a tax deduction for the wages you pay your kids, which reduces your taxable income

2. By paying your children, you are effectively transferring income from your higher tax bracket to your childrens' lower tax bracket

3. You reduce your self employment income, thus you also reduce your self employment tax

4. Your kids may not owe any tax on the amount you pay them, depending on how much they earn and whether you claim them as a dependent or not (in 2009, dependent children can earn up to $5,700 before they will owe any income tax)

5. Paying your children a wage allows them to open an IRA or Roth IRA, which gives them a jump start on saving for retirement, college and other goals

If you have entrepreneurial kids, consider starting the business in your name and hiring your children instead of having the kids own the business. This will reduce your family's overall tax burden.

Why would it matter who owns the business? Well, if you are self employed, you have to pay self employment tax on your net earnings over $400. This rule applies to both adults and children, so there is no advantage to being a kid when you're self employed. However, kids have a huge advantage if they earn wages paid from an employer. Why? Well, kids don't have to pay taxes on the first $5,700 of earned income, even if they are claimed as a dependent on their parents' tax return.

Here's an example:

Let's assume Teddy, who is 14 years old, has a web design business. In 2009, he expects to earn $5,000 from this business after all of his expenses.

If Teddy is the owner, he is considered self employed and will have to pay 15.3% in self employment tax on this income. Assuming this is his only income, he won't owe any federal income tax because his total earnings are less than the standard deduction amount ($5,700 in 2009), but he will still have to pay self employment tax on the net profit. Teddy's total tax in this example will be $765.

Now let's assume that Teddy's dad is the owner of the business and he hires Teddy to do the work. Teddy still makes $5,000 from this business, but because he is an employee instead of the owner of the business, he doesn't have to pay self employment tax. Teddy's dad will report the $5,000 in income on his tax return, but he gets to deduct the $5,000 he pays Teddy to work in the business, so dad won't owe any tax on this income. In addition, because Teddy is under 18, Teddy's dad doesn't have to pay payroll taxes on him. Finally, because Teddy earned less than the standard deduction, his total tax liability will be zero.

In this example, the family's total tax savings by having the business in the father's name and having the child as an employee instead of the owner is $765.

Parents: want to learn how to minimize your family's taxes? If you have a small business, or if your child has their own business, you'll want to learn how to hire your children to help minimize your family's tax burden.

http://hireyourchildren.com

Kristine A. McKinley, CPA, and CFP®, offers financial and tax planning on an hourly, fee-only basis. She specializes in helping home based and online business owners understand and minimize their income taxes so they can keep more of their profits.

Child Entrepreneurs - Don't Forget About Taxes

Author: Kristine McKinley

Source: ezinearticles.com



Most kids who start their own business do so because they want to make some extra money, maybe so they can buy a car or save for college or just for some extra spending money. Regardless of why they start their own business,, income tax bracket, I'm guessing that most of them don't think about the taxes they will owe on their profits.

However, as self employed people, taxes could be one of their biggest expenses. Self employed people are subject not only to federal income taxes, but to self employment taxes as well. As a result, this can be the biggest expense for a self employed person, and can be quite a shock if you're not prepared for it.

If you're not familiar with self employment tax, basically it is Social Security and Medicare tax on people who work for themselves. This tax is used to fund benefits you receive when you retire (old age and hospital insurance). It is also used to pay benefits if you become disabled, or to your family in the event of your premature death (disability and survivor insurance).

Self employment tax is similar to the payroll taxes withheld from the pay of most employees. The biggest difference is that as a business owner, you are required to pay both the employee and the employer's share of the Social Security and Medicare taxes. So while employees of a company pay 7.65%, self employed people pay 15.3% in Social Security and Medicare taxes.

Self employment tax is on top of federal and state income taxes, which is why it catches most sole proprietors by surprise. So if you are in the 10% tax bracket (we'll assume no state income tax for this example), your taxes on your profit from your business could be over 25% (15.3% self employment tax plus 10% federal income tax).

When is self employment tax due? The federal income tax system is a pay-as-you-go tax system. That means you pay taxes as you earn income throughout the year. For employees, taxes are withheld automatically from their paycheck, but self employed people must send in estimated tax payments to comply with the pay-as-you-go rule.

The general rule is that you must make estimated tax payments if you expect to owe at least $1,000 in tax for the current tax year, after subtracting your withholding and tax credits. Estimated tax payments are due on April 15, June 15, September 15 and January 15 of each year (or the next day if the 15th falls on a weekend or holiday). Failing to make estimated tax payments on time could result in a penalty even if you are due a refund when you file your tax return.

It's a good idea to set aside 20-30% of your profits (depending on how much other income you have and what tax bracket you fall into) even if you aren't required to make estimated tax payments to make sure you have the money to pay your taxes when you file your tax return.

Parents: want to learn how to minimize your family's taxes? If you have a small business, or if your child has their own business, you'll want to learn how to hire your children to help minimize your family's tax burden.

http://hireyourchildren.com

Kristine A. McKinley, CPA, and CFP®, offers financial and tax planning on an hourly, fee-only basis. She specializes in helping home based and online business owners understand and minimize their income taxes so they can keep more of their profits.