The BEST tax deduction for Self-Employed

December 27, 2011 The BEST tax deduction for Self-Employed

Attention self-employed with children under 18 years old – we have a great tax deduction for you.

If you can justify employing your minor child in your business, you get the tax deduction on wages paid to them and your child picks up the income on his tax return (under $5,700 in income, though and no Federal Income tax).  If the child is under 18 years old, there is no employee or employer Social Security or Medicare tax.  The only caveat is that, if audited, you need to demonstrate that the pay is worth the services that your child provided to your business.

As an example, assuming you pay each of your two children $5,000 apiece, your family Federal tax savings are $3,738, , under the following scenario.  There are additional savings if you live in a state that has a State Income Tax.

Business:                                           Any unincorporated business

Filing Status:                                    Married with 2 children

Adjusted Gross Income:                 $100,000 ($90,000 from business and $10,000 from other sources)

Itemized Deductions:                      $20,000 (Mortgage Interest, Real Estate and State taxes, Donations, etc)

The payment to your children needs to be paid on a W-2, not on Form 1099.  Therefore, you will have some filing requirements, such as preparing the W-2, Form 941, Form 940, etc.  We can email you a free information packet ([email protected]) so you can easily do these filings yourself or you can use one of the many inexpensive web services.  You can pay these wages on one paycheck at the end of the year.

You can always instruct your children to use this money to pay for items that you would typically pay for them, such as private school tuition, recreation, vacations, gifts, etc. You can also invest up to $2,000 into a Roth IRA for them.

This deduction does not work as well if your business is incorporated, as the children wages will trigger Employee and Employer Social Security and Medicare tax.

This is one of the best tax deductions for self-employed, if you can justify these wages.  It reduces your Federal Taxes by 14% – a very significant tax savings.

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IRS Circular 230 Disclosure

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this document is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in this document.

1Comment
  • Sarah
    Posted at 22:20h, 29 December

    I did not know about this — what a great way to lower taxes! Now if only I had kids I could pay to help with my editing business… 🙂 Thanks for the update!