Hiring family members for your small home business can definitely help you save on the taxes mandated by the IRS. Your business can take deductions due to reasonable compensation paid to an employee who is a family member. Find out how employing family members such as a spouse or child can work to your advantage tax-wise.
1. Hiring Children in the Family
There are several small businesses that even the children in the family can help with such as a copywriting business or a small pastry shop. Children who are under 18 years old and who are employed under their parents or guardians' sole proprietorship are not subject to certain specific taxes such as the Social Security and Medicare Taxes. On the other hand, those who are under 21 years old are not subject to the FUTA or Federal Unemployment Tax Act.
Children are subjected to withholding taxes but wages paid to them are taxed in lower brackets as compared to that of a parent. Their wages also reduces a business' net income which in turn reduces the parents' self employment taxes.
The tax benefits in employing your child mentioned above does not apply, though, if only one of the parents owns the business. Another exception is when your child has no unearned income; withholding taxes applies if it only exceeds the entire year's standard deduction. As of 2005, the standard deduction amount is at $5,000 and children who are paid less than this do not have to pay income taxes. You are also required to file the Employee's Withholding Allowance Certificate regardless of how much you pay your child.
2. Hiring Your Spouse or a Parent
When hiring a spouse, the compensation you pay for your partner will stay in the corporation's net income which in turn will save you on taxes if you belong to the higher bracket in the tax continuum. Sole corporate owners do not have to worry about reporting personal returns or whether they're paying their spouse with a fixed salary or not.
If your spouse is looking into going back to school, taking them under your employment wing has an advantage too. Businesses can deduct expenses paid to enhance an employee's skills from their net-income and this is tax-free (same with travel expenses). If you go on business trips and your spouse tags along, you can also deduct travel costs such as airfare and lodging. This is also tax-free.
If your business meets certain tax code requirements, you can deduct the full amount of your spouse's retirement plan from your payroll. If you're on a profit-sharing plain, the contributions that can be deducted can amount up to 25 percent of your spouse's compensation or no less than $42,000. For those with a 401K plan, the employed spouse can defer up to $14,000 of his salary plus an extra $4,000 if he is above 50 years old.
When it comes to health insurance, you can also deduct the entire premium of your spouse's health insurance from the company's expenses. An added bonus is when you get your spouse a separate personal health plan.
In employing parents, their wages are subject to FICA withholding taxes but not to FUTA taxes.