As Self-Employed Independent Contractors, Real Estate Agents may need help in running their business and sometimes it makes sense to hire family. Today, we’ll cover a few areas where it might be helpful to hire your children as well as adult family members to provide services to the business.
Employing Children
An excellent strategy to reduce the overall family tax burden is to employ your children. Unlike investment income earned in their name, your child’s earnings will not be subject to what they call “kiddie tax.” What kiddie tax means is that your child’s income will be taxed at your highest rate. However, earned income is not subject to this regulation. Therefore, if you pay your child for services actually performed, you can take a tax deduction and they may owe no tax on that income.
Note that the work should be appropriate to the child’s age and actually be performed by the child. There are many tasks and even young children are able to perform including things like folding mailers, stuffing envelopes, and applying address labels.
Care must be exercised not to lose the dependency deduction for your child. In certain situations a parent may not be able to claim a credit or deduction for education expenses because their income is too high. If the child has no income the credit is lost.
Payments from parent to child create income that will allow the credit to be used along with the reduction in regular income tax. Planning of this type will minimize you tax liability.
Employing Adult Family Members
Children are not the only family members where the opportunity to reduce taxes exists. If you employ adult family members, you may justify larger wage payments and they can be included in benefits like health and retirement plans. Some deductions are limited based on your Adjusted Gross Income which is reduced by the wages paid. The result is that you potentially get even larger deductions and save more tax.
How Much Can You Save?
Here’s an example. Let’s say that you have a child under the age of 18 who earns $2,500 for services. Children under the age of 18 may be exempt from withholding for Social Security and Medicare and if that is their only income, they will owe no income taxes. On the other hand, if the parent is in the 24% tax bracket, they might save up to $982.50 (24% of federal income tax plus 15.3% of Self-Employment tax). That’s an all around win. The child learns a skill while earning a wage and the family saves overall.
If you are a Realtor or other Small Business owner who needs professional help with your taxes, keeping your books properly, or dealing with any IRS issues, give me a call at (972) 821-1991 or send me an email at [email protected]. Learn more about us at https://jablonskyandassociates.com/real-estate/
