A Brilliant Tax Strategy for Paying Your Children

November 24th, 2023 at 10:48 AM

The hire-your-child strategy works best for the Schedule C proprietorship because in this entity structure, the tax code exempts both the child and the proprietorship from payroll taxes. Corporate tax entities do not enjoy this tax benefit.

However, there is a strategy to avoid payroll taxes on children over age 18 and doing work for your corporation; basically, circumventing the withholding & matching the social security & Medicare taxes. This article will explore a strategy to employ to avoid these payroll taxes.

For example, say you pay your child $15,000, you deduct this amount in your high tax bracket and your child pays $115 in tax; that is a good return on investment!

This strategy works in conjunction with the tax code which states:

• net earnings from self-employment means gross income derived from any trade or business carried on by such individual continuously and regularly and that a sporadic, or 1-time, activity does not qualify as self-employment.

If you contract with your child in your business to perform a 1-time task such as painting your office, installing office windows, creating a website, creating company logos or videos, etc.---these are 1-time activities NOT subject to self-employment. These activities are not likely to qualify your child as an employee, as well.

By not being subjected to the definition of self-employment, your child & you escape the payroll taxes & the self-employment tax. He or she will receive a 1099-MISC; NOT a 1099-NEC. --or W-2 form--- the 1099-NEC is for self-employment individuals.

Therefore, if you are in the 35% tax bracket, your net savings would approximate $5,135 on $15,000 of 1099 Income.

If this seems like a possible scenario, please contact me for further details.

Mark S. Fineberg, CPA