Make Your Kids Rich And Save Business Taxes

One often-overlooked tax benefit for business owners is putting their kids to work in their business.

If you are self-employed, you can take advantage of this by paying your kids $4,000 each for performing services in your business. The business gets a tax deduction for the compensation, which saves taxes on the parent’s tax return. Also, there are no Social Security or Medicare taxes due on the wages you pay to your child.

The next step is to open a Roth IRA for the child and contribute the $4000 to the IRA. The child may not withdraw this money until age 59 ½. The earnings and contributed amounts grow tax-free and are generally never subject to tax when withdrawn. On the child’s tax return, the child gets no tax deduction for the IRA, but the child may not pay tax on the $4000 if they are at a low enough income level.

If you do this for ten years, from age 8 to 18, and the IRA earns an 8% return each year, your child should have around $1.5 million at age 60, and that should grow to over $2 million by age 64.

If you plan to do this, consult with a professional tax advisor first and ensure your children perform your business services. Also, check that the work is not violating any child labor laws.

The information contained herein is not intended as tax advice. To comply with requirements imposed by the IRS, any information contained in this communication cannot be used to avoid penalties under the Internal Revenue Code.