A salary paid to a child under the age 18 is not subject to social security, medicare and FUTA tax (up to age 21) when employed in a parent's sole proprietorship or partnership. This means it is possible to pay your child up the $19,000 with no taxes being paid by the child. This will be earned income and is not subject to the Kiddie Tax.
By shifting earned income to the child, the parent can take advantage of the standard deduction and 15% income tax bracket (now 10% tax bracket if not over $7,300 of taxable income).
Example 1: A parent pays a child $19,000 in wages and the child participates in the company SIMPLE IRA plan and also makes a $4,000 deductible IRA contribution. For 2005 the following could apply to your child with the proper tax planning:
SIMPLE IRA Contribution..........$10,000
IRA Contribution........................ 4,000
Standard Deduction .................. 5,000
Totals........................................$19,000
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Total Tax Savings of ($7,650) for the parent based on an estimated 25% tax bracket of parent.
Self-employed tax savings ($19,000 x 15.3%) $ 2,907
Federal tax savings ($19,000 x 25%) 4,750
Total Savings $7,650
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This would be a tax savings per child!
Example 2: A child, under age 18, is employed by a parent and is paid a $10,000 salary. The child makes a $4,000 deductible IRA contribution/
Self-employed tax savings ($10,000 x 15.3%).................... $ 1,530
Parent?s federal tax bracket savings ($10,000 x 25%)....... 2,500
Parent?s total federal tax savings........................................ $ 4,030
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Less: Child?s federal tax
Note: Based on new 10% tax bracket
($10,000 - $5,000 - $4,000 = $1,000)........................ (100)
Net federal tax savings per employed child......................... $ 3,930
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Even if you are not a sole-proprietorship or partnership, you can still benefit from federal tax savings from shifting income to lower tax bracket children.
Note - Wages must be reasonable and you have to prove the child actually worked.
Giving your kids a paycheck beats giving them an allowance.
