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I have a client who wants to pay his minor children(10,13) a paycheck for actual work performed in his retail store rather than pay them out of his pocket at his tax rate. Is this generally ok? It is a proprietorship by the way. Also, if the children then have earned income, could they contribute to a Roth IRA?

Thanks in advance,

Chris
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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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[[I have a client who wants to pay his minor children(10,13) a paycheck for actual
work performed in his retail store rather than pay them out of his pocket at his
tax rate. Is this generally ok? ]]

Not only is it OK...you might want to recommend it to ALL of your Sch C clients (it doesn't work as well with corporations and/or partnerships). The kids have to perform actual work, and the compensation must be in line with the work performed. But it is a great way to get the kids non-taxable (in many cases) income. And fund the kids IRA...either traditional or Roth...and reduce dad's SE taxes and Sch C profit all at the same time.

[[It is a proprietorship by the way. Also, if the
children then have earned income, could they contribute to a Roth IRA?]]

Certainly. You might want to read more about this in my post on the issue in the taxes FAQ area. The post is entitled "Putting Jr. on the Payroll". I think that you'll find it interesting and right on point.

TMF Taxes
Roy

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[[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]]

One of the additional beautiful things about this strategy is that the kids DON'T have to pay any FICA taxes...either employer or employee portion...as long as they are under age 18. And they don't have to pay any FUTA (fed unemployment payroll taxes) if they are under age 21.

It's really a nice deal.

TMF Taxes
Roy
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