Today TaxMama hears from Deanna in the Tax Parlor, who says “My husband and I are about to elect S-corp status in an LLC. We currently pay our kids wages in the LLC, but are wondering if there is any real benefit to continuing this in the S-corp?”
Hi Deanna,
The benefits for hiring your child in an S corp aren’t the same as those if you were self-employed.
For instance, your child’s wages will be subject to all the normal taxes.
So what’s the benefit?
Your child is working with you.
You have a good reason to have conversations with your child with respect to the job and the business, that just kind of lead towards normal personal conversations, without your having to pry or put your child on the defensive.
The tax benefits?
The business gets a deduction for everything you pay your child.
Wages are taxed at your child’s rate, not yours, unlike investment income.
If the work your child does supports it, you may pay your child enough to avoid having to ever provide an allowance.
Your child can put money into IRAs, education IRAs, savings – or?
Lots of good reasons to have your child on payroll – as long as your child is actually WORKING for the company.
I don’t advise you to put them on payroll just on paper, so you can issue a check. Aside from the tax fraud consequences…just think of what that kind of thing teaches your child.
I know. You’d never do that. But someone else, reading this, just might.
And remember, you’ll find answers to lots of questions about hiring kids and other tax information, free. Where? At TaxMama.com
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- Small Business Taxes Made Easy :: Chapter Nine – Includes – Hiring Family Members
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