Did you know that you can hire your child to help grow your business and you can deduct those expenses on your annual tax filing? Oh, and if you pay them less than the standard deduction, they don’t have to file a tax return at the end of the year. Crazy, right!!
This tax strategy literally allows for your child to receive tax-free money that you received a federal and state tax deduction for through your business.
So, what’s the point?
Well, if you want to set up your child for life, you would next open up a Roth IRA in your child’s name and because your child actually received an income from your business for services rendered, their paycheck can be contributed (up to $5,500) to the Roth IRA. Then, you would pay him or her a salary for helping you with your business every year until they get through college. Oh, and you would teach him or her along the way about contributing to a Roth IRA and why it is so beneficial.
So, if my daughter started contributing to a Roth IRA at age 4 and contributed every year until age 65, and it earned an average of 7% interest she would have almost $5 million in her retirement account when she wants to retire. Wow!
That’s pretty powerful, right!
So, here’s how you do it:
You’ll need to figure a market rate for the type of work your child will be doing. Not sure if you’ve noticed, but I’ve started to use pictures of my kids in my blog posts, Instagram posts, and my random marketing schemes; my 3-year-old is getting paid for her modeling services. Once you figure out what your child’s services are worth, you’ll go about it like this:
- Pay her salary directly to her. Either open up a bank account for her, or just track what you plan on paying directly to the IRA at the end of the year. You can pay any amount up to $12,000 before she’ll have to pay taxes on it (2018 rules).
- Let your CPA know that dollar amount before January 31of next year. Your CPA will need to prepare a W-2 for her. She will not need to file a tax return, but you’ll need that W-2 as proof that she had earned income and, therefore, is eligible to contribute to an IRA.
- Set up and contribute to the IRA. Maximum amount will be $5,500 (for 2018).
- Do this every year until she is old enough to understand and take over contributions herself.
You just made your daughter a multi-millionaire. She’ll thank you later, I promise.
Written by Stuart Grazier