Hire Your Kids and Save on Taxes

AccountingWEB
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A perfectly legal way for freelancers and other self-employed individuals to trim taxes is to employ their children. Their salaries stay in the family, but are shifted into their lower tax bracket. The jobs also put some "jingle in their jeans," familiarize them with freelancing, and instill a bit of the old work ethic.

Responsible youngsters are able to handle all kinds of chores. Some of the more common ones include answering telephone calls, cleaning offices, addressing envelopes, filing, bookkeeping, secretarial and other clerical work, and making deliveries. Nowadays, lots of kids are more adept with computers than older employees.

The Way It Works
Imagine that your business hires Eli, your 16-year-old son, to do clerical work after school, on weekends and during school vacations. The law allows him to offset earned income with a standard deduction—the no-questions-asked amount authorized for someone who doesn't itemize. For 2014, a single person's standard deduction is $6,200. So the first $6,200 of Eli's earnings escapes income taxes. He can use the money to support himself or put away for college, a car, or a vacation.

True, earnings above $6,200 will lead to a tax liability for Eli. However, the excess falls into the bottom income-tax bracket of 10 percent, which applies to taxable income of up to $9,075. His 15 percent bracket applies to taxable income between $9,075 and $36,900. In fact, using 2014 as a marker, not until taxable income surpasses $36,900 would this part-time teenage employee move beyond the 15-percent bracket and ascend to the relatively lofty 25-percent bracket.

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Julian Block
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