284. The Triple Tax Benefits of Paying Your Children
Jul 30, 2024
auto_awesome
Discover the surprising triple tax benefits of employing your children in the family business. Learn how this strategy not only offers financial perks but also instills a strong work ethic and valuable life skills in kids. Dive into the legal guidelines and income limits for hiring young workers, plus the advantages of funneling their earnings into a Roth IRA for tax-free growth. This insightful discussion reveals how to maximize tax efficiency while preparing the next generation for financial success.
Paying children to work in a family business provides significant tax benefits while teaching them essential skills and work ethics.
This strategy allows parents to lower their taxable income and enables children to invest their earnings in a Roth IRA for future growth.
Deep dives
Benefits of Paying Children in Business
Paying children to work in a family business can yield significant tax benefits while simultaneously teaching them the value of hard work. According to the Fair Labor Standards Act (FLSA), parents can employ their children under the age of 18 without strict hour limits and compensate them up to the standard deduction amount, such as $14,600 for 2024, tax-free. This strategy not only reduces the taxable income of the parent but also helps children build skills, a work ethic, and understanding of financial concepts from a young age. Establishing early work experience can prevent children from becoming overly reliant on family wealth, allowing them to grasp the value of money and its management.
Navigating Legal Compliance and Fair Pay
It is crucial that parents adhere to legal guidelines and ensure that children are paid a reasonable wage for legitimate services within the business. The wages should typically reflect the minimum wage applicable to their location, while compliance mandates that appropriate tax forms, such as W-2s, be filed. Failure to comply can lead to the misclassification of the employment arrangement, resulting in legal repercussions. Parents must also create a clear job description, ensuring that the roles and tasks assigned to their children are appropriate for their age, which strengthens the legitimacy of the compensation.
Tax Benefits for Parents When Employing Their Children
Employing children also brings considerable tax advantages for parents, which include deductions that can lower the family’s overall tax burden. The wages paid to children decrease the parent's taxable income, thus reducing the taxes owed, particularly for those in higher tax brackets. When children receive these wages tax-free, it creates an opportunity for generational wealth to be built without the immediate financial strain on the family. This transfer of income enhances family resources without leaving the household, aiding in wealth accumulation within the family unit.
Using Roth IRAs for Long-Term Financial Growth
A strategic benefit of employing children is the ability to contribute their earnings into a Roth IRA, providing significant long-term financial advantages. Contributions to the Roth IRA can be made up to $7,000 as of 2024, allowing children to invest early and potentially grow their wealth tax-free over time. Since the income is generated through legitimate wages, it is not subject to the same tax implications as gifts, which typically do not qualify for IRA contributions. This investment strategy underscores the potential for young earners to enjoy compounded growth throughout their lifetimes, laying a strong foundation for future financial independence.
In this episode, Thomas & Ryan review the triple tax benefits of paying your children to work in your business and explain how to accomplish this.
Not only will you reap the tax benefits, but your children will learn the value of hard work and build their resume.
This is an incredibly tax-efficient strategy within an episode you won't want to miss.
To become a client, request a consultation from Hall CPA, PLLC at go.therealestatecpa.com/3KSEev6
Start our free 4-day email series:
go.therealestatecpa.com/3ygHVrJ
Join the Tax Smart Insiders Community:
go.therealestatecpa.com/3Xx1Cpd
The Tax Smart Real Estate Investors podcast is for general information purposes only and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Information on the podcast may not constitute the most up-to-date legal or other information. No reader, user, or listener of this podcast should act or refrain from acting on the basis of information on this podcast without first seeking legal and tax advice from counsel in the relevant jurisdiction. Only your individual attorney and tax advisor can provide assurances that the information contained herein – and your interpretation of it – is applicable or appropriate to your particular situation. Use of, and access to, this podcast or any of the links or resources contained or mentioned within the podcast show and show notes do not create a relationship between the reader, user, or listener and podcast hosts, contributors, or guests.
Get the Snipd podcast app
Unlock the knowledge in podcasts with the podcast player of the future.
AI-powered podcast player
Listen to all your favourite podcasts with AI-powered features
Discover highlights
Listen to the best highlights from the podcasts you love and dive into the full episode
Save any moment
Hear something you like? Tap your headphones to save it with AI-generated key takeaways
Share & Export
Send highlights to Twitter, WhatsApp or export them to Notion, Readwise & more
AI-powered podcast player
Listen to all your favourite podcasts with AI-powered features
Discover highlights
Listen to the best highlights from the podcasts you love and dive into the full episode