Stop giving your child or children a non-deductible allowance! Instead, take advantage of one of the most remarkable tax-saving strategies available for home-based businesses, one that’s right under your own roof. The tax savings strategy I’m referring to is perfectly legal in most tax jurisdictions.
Simply employ your son or daughter, under the age of 21, in your business and pay their salary. (You could also hire your spouse, but your tax savings probably won’t be as great.) Wages are taxed at your child’s tax rate and receive the benefit of the full standard deduction. Looking at this type of action, purely from a tax standpoint, it is better to pay wages to a child than to give them an income-producing gift, such as shares in a stock mutual fund.
In addition, because your child’s wages are deductible as a business expense, it also reduces your net income from the business and pays less in tax. But that is not all. Wages paid to your child are exempt from employment taxes. The effective cost of employing your minor child instead of a non-family member is therefore much less. Also, paying your youngest child a salary does not cost you her exemption, as long as you don’t pay too much.
When I say employ, above, I mean that they must do something in and for the business, like photocopying, filing, making phone calls, etc. and the payment made must be reasonable. Again, keep track of the work you are paying them for, or keep detailed information on your time cards so that it is available to the tax authorities if they require it.
Although not essential, treat them like any other employee and pay by check so there is a paper record of your transactions with them.
Note: Tax legislation differs between countries and each country can change its rules at any time. The information provided in these newsletters is accurate at the time of publication. However, you should seek specific information from your tax advisor or the tax department regarding your own situation each year in which you are required to provide income and expense statements.
John Ritchie, AIB, AICB, FICB, email: [email protected]