Why Clients Should Pay Their Kids a Salary

Nov 9th 2018
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I am 46 years old. My wife and I had our kids early: The oldest is 20, and the youngest is 17. 

Our theory was that while our friends were out partying, we would have the kids young and party later, when we had the money to do it. I put myself through college, and I didn’t want that for my children.

When they were six and three, we began paying them a salary, but they never saw the money. Instead, it went towards Florida’s prepaid college plan, where you lock in today’s cost for education, even if your child won’t be attending for a decade or so. In addition, we stared a 529 plan and skipped vacations, going out to dinner and other things to do this.

This brings me to my point: I was 24 and my wife was 21 when we had our first kid. We weren’t exactly in the highest tax bracket, but we made our son’s education a priority. Today, it is the advice I give to my clients. 

Let’s say your client has a pass-thru entity and is in the 37 percent tax bracket. Moving their income to the 10 or 22 percent one is attractive. Also, today 529’s can pay for private school. By giving some of your salary to your child, you shift the tax burden from your higher tax bracket to their lower one. The child has to have control of the money, but while they are a minor, you can put it in a 529. 

Now, let’s discuss 529 plans.

I am against a child having access to money when they turn 18. We were all young and dumb once. There are Uniform Transfers to Minors (UTMA) accounts where, at this age, the teenager has access to the funds. With a 529 plan, you own the account, and you child is the beneficiary; they never have access to it.  The monies you put into the account grow tax-free, and, if used for private school or college, they are tax-free as well. 

Besides the salary you pay your child, you can gift them $15,000 (or $30,000, if you are married and you and your spouse elect to split your gifts). The most you can put into a 529 is $250,000 in your lifetime. The ultimate goal is to shift income from your higher tax bracket to your child’s lower one and pay for college to boot. If they decide not to go, you can use the funds for their siblings or even a first cousin. 

The new wrinkle as of January 1, 2018, is you can use a 529 to pay for private school. This is attractive for high-income earners. 

One thing worth mentioning: If you pay your child, you will receive a letter from the Social Security Administration (SSA) asking why you are doing this. Typically, the answer can be that they shred documents and do light office work. The SSA doesn’t really care, as you are paying FICA. 

Shifting income from a higher tax bracket to a lower one is nothing new, and it satisfies two objectives. You pay less in taxes, and you can pay for your child’s college or private school. The 529 plans can pay for things like off-campus housing, books and supplies, computers, computer software, internet services, special needs equipment and other expenses.

As you can see, paying your children is a no-brainer.

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cody sartony
By codysartony
Nov 16th 2018 03:51 EST

A round of applause for your article post.

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By Michael Abrams
Nov 17th 2018 10:49 EST

It's one thing to "pay" the children for federal purposes, but if the child is too young for state labor laws, does this change your thinking? Also, are you advocating "paying" the child even if they don't do any actual work?

I believe in some states, there are no age restrictions for one's own children, except for certain safety issues.

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