Message Font: Serif | Sans-Serif
No. of Recommendations: 0
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!
Print the post  


In accordance with IRS Circular 230, you cannot use the contents of any post on The Motley Fool's message boards to avoid tax-related penalties under the Internal Revenue Code or applicable state or local tax law provisions.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.