Software of the Month Club 1997 March/Software of the Month Club 1997 March.iso/pc/dos/lg/sba/f424.sbe

Text File | 1996-09-23 | 6.5 KB | 129 lines

           ┌─────────────────────────────────────────┐
           │     HIRING CHILDREN OR OTHER FAMILY     │
           │     MEMBERS IN YOUR SMALL BUSINESS      │
           └─────────────────────────────────────────┘

One of the flexibilities of owning your own business is
that you have considerable opportunities for saving on
payroll and income taxes by hiring your children our
spouse to work in the business.  While this may smack
of nepotism in some cases, that will rarely be  serious
problem in most instances in small businesses, especially
where you employ few, if any, non-family members.

Hiring your younger children, all other things being equal,
can save on both FICA (Social Security) taxes and federal
and state unemployment taxes.  By hiring a child under the
age of 18 in an unincorporated business owned by his or
her father or mother (or jointly owned by both the father
and mother), the child's wages will qualify for an exemption
from FICA taxes.  Thus, in a business where you, as the
parent, are subject to self-employment tax on your net
income, paying wages to your child will shift income to
the child, reducing your net self-employment income that
is subject to self-employment tax, while the child pays no
FICA tax on his or her wages.

The wages will also be exempt from federal unemployment
taxes, as well, if the child is under the age of 21.  A
similar exemption from state unemployment tax is also
available in many states, although it only applies to
children under age 18 in some states which have a lower
age of majority.

Hiring some other person who is not your child would
require you to pay unemployment tax on the employee's
wages, even to a person under the age of 18 or under age 21
(unless the employee is your spouse or one of your parents,
who also qualify for exemption from unemployment taxes).

      NOTE RE YOUR COMPANY, @NAME:
      (@NAME is a @ENTITY)
------------------------------------------------------------
@IF113xx]Since your firm is a limited liability company, it will not
@IF113xx]be able to qualify for the above-mentioned exemptions for
@IF113xx]wages paid to a child of the owners, unless the only members
@IF113xx]of the LLC are you and your spouse, and then only if the LLC
@IF113xx]is treated as a partnership, not as a corporation, for tax
@IF113xx]purposes.
@IF115xx]Since your business is a sole proprietorship, you should be
@IF115xx]able to qualify for the above-mentioned exemptions for wages
@IF115xx]paid to one of your minor children.
@IF116xx]Since your firm is a partnership, it may not be able to
@IF116xx]qualify for the above-mentioned exemptions for wages paid
@IF116xx]to a child of the owners, unless the only partners in the
@IF116xx]partnership are you and your spouse.
@IF121xx]Because your firm is incorporated, you will not be able to
@IF121xx]take advantage of the payroll tax savings described above
@IF121xx]by hiring your minor children to work in the business.
------------------------------------------------------------

There are also income tax benefits if you hire your children.
To the extent you pay wages, you reduce your taxable income,
and shift the income to the child's lower income tax bracket
in most cases.  Thus, if you are in a 31% income tax bracket,
and pay your child $3,000 to work for the family firm over
the summer, the child will usually be in a 15% bracket, for
a federal income tax savings of 16% (31% - 15%) times $3,000,
or $480.  Plus, in some states, there may also be a state
income tax savings from a bracket shift.

In many cases, if the child has little or no other income,
the wages received by the child will be completely untaxed,
due to the standard deduction and personal exemption.  While
there is a federal "kiddie tax" that subjects an under-14
child's unearned (investment) income in excess of $1,300 to
taxation at the parent's higher marginal tax rate, the
"kiddie tax" does not apply to the child's earned income
(such as wages), which thus can be sheltered in full by
the child's standard deduction and personal exemption.

For even more income tax savings, note that an additional
$2,000 of the child's income can be fully sheltered from
tax, over and above the standard deduction and personal
exemption, if the child contributes up to $2,000 to an
individual retirement account.  Also, if your firm has a
Simplified Employee Pension Plan ("SEP") that does not
exclude participants under the age of 21, your child may
also qualify for a tax-deductible SEP contribution from
your company equal to 15% of the child's wages.  However,
the child must also meet all the other eligibility
requirements of the SEP, such as the common (optional)
provisions that allow an SEP to exclude any employee who
has not performed services during at least 3 of the
immediately preceding 5 years.

All of the foregoing income tax savings are in addition
to any payroll tax savings, as were noted above.

Besides the tax benefits of hiring your children in the
family business, you may also generate tax savings by
hiring your spouse.  Formerly, a spouse's wages were
exempt from FICA tax, but this "loophole" was closed by
Congress a few years ago.  However, an exemption for wages
paid to a spouse still exists under the FUTA tax, and
under state unemployment tax laws.
@IF120xx]
@IF120xx]TAX PLANNING TIP ON MEDICAL COVERAGE FOR THE SELF-EMPLOYED:
@IF120xx]-------------------------------------------------------------
@IF120xx]One income tax disadvantage commonly faced by unincorporated
@IF120xx]small businesses such as yours is that any medical insurance
@IF120xx]you pay for on yourself, as a self-employed person, is only
@IF120xx]30% (40% in 1997) tax-deductible.  However, one way around
@IF120xx]this limit is to hire your spouse as an employee of the
@IF120xx]business, setting up a medical insurance plan for your
@IF120xx]employee or employees, and thereby obtaining coverage for
@IF120xx]yourself as a family member under your spouse's employee
@IF120xx]coverage.  While this might seem to be an obvious subterfuge,
@IF120xx]the IRS has ruled that such arrangements are valid for tax
@IF120xx]purposes, so the business can take a full deduction for the
@IF120xx]medical insurance that covers your spouse and, indirectly,
@IF120xx]you.

Be aware that, while hiring your children may make sense
for tax purposes, there are child labor laws, both federal
and state, that may restrict your ability to hire children
(including your own) to work in your business.