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Financial Planning / Tax Strategies
|Subject: Re: Paying children to work||Date: 7/12/1999 6:41 PM|
|Author: zorloc||Number: 17208 of 122104|
Sounds good to me. He will have pay the appropriate employment taxes though.
And yes the money could then go to a Roth IRA.
If he sets up a Simple IRA the money could be held pre-tax, and then your client could make matching contributions (up to 3% of compensation), and those matching contributions would count against the business profit and thus will he not be taxed on it (of course this will be pretty small). A SIMPLE would probably pre prefered over a SEP, because the SEP is limited to 15% of compensation, while the SIMPLE has no % of imcome limit. You are limited to $6000 in employee funds, which can be ALL of the employee's compensation.
I would fund the Roth IRA first though.
It would also be OK to pay the kids a wage - have all of that money go to savings -> Roth and Simple IRA, and pay the kids non earned income out of his pocket for the kids use.
[Note the bottom is an approximate, I am ignoring a few small factors in the interest of cleanliness.]
If he paid each kid $9000 (~$173/week). He could max them out in a Simple ($6000 plus a match of $270), this would leave them with an income of $3000. SS+Medicare taxes will eat up $700 which you will have to match (if the kids have to pay - I DON'T KNOW THE RULES) leaving $2300. With this income they should not have to pay taxes. With $2,000 into a Roth, that leaves $300 for their own use.
This wouldn't save you in self employment taxes, because you will just be paying their SS taxes. But you will save a lot in income taxes for his profit will be reduced by ~$9,700. And thus his savings would be his tax rate times that amount
It all depends on how much he has and how much the kids work. Don't pay your kids $15/hour - the IRS will probably take a dim view of that.
If I missed something please speak up!
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