Put the ‘Family’ in Family Business
Consider employing your minor children for summer or part-time positions if you run a small business. Apart from the quality time spent with your kids and their valuable on-the-job experience, there are enticing tax advantages to reap.
You can classify any wages paid to your child as standard employment income, like any other staff member or contractor, provided the compensation is reasonable and the work performed is genuinely beneficial to the business. This deduction reduces your overall business income, subsequently cutting down your income and self-employment tax obligations.
Your child must file a tax return to declare their earnings. However, if their income falls below the standard deduction threshold ($14,600 in 2024), they won’t owe federal income tax. Even if their earnings exceed the standard deduction, subjecting them to taxation, the tax rate starts at a mere 10%. Furthermore, certain conditions can exempt your child’s wages from Social Security and Medicare taxes, resulting in further tax savings.
Once your child earns income, they become eligible to contribute up to $7,000 annually to a traditional or Roth IRA which grows on a tax deferred, or even better, a tax free basis depending on the type of IRA. Early life contributions by your child to retirement accounts can unlock the potential of exponential growth and result in an account worth hundreds of thousands, or even millions of dollars by his or her retirement age.
Don’t Hold Back On Adjusting Your Withholding
When filing your year-end income tax return, a significant portion, if not all, of the taxes owed on your earnings have typically been prepaid by your employer throughout the year.
Life events such as marriage, parenthood, home purchases or acquiring/losing another
job can significantly alter your tax liability. Should any of these occur for you, adjusting your withholding with your employer should be a top priority. To do this, you will need to fill out a new Form W-4.
Insufficient withholding may lead to underpayment penalties, while excessive withholding results in a refund. While many welcome refunds as extra cash, it’s important to recognize that a refund only results when too much of your money has been paid in as taxes. Over-withholding essentially provides the government with an interest-free loan.
