TRANSCRIPT:

Hiring your child in your business can be a great tax strategy, but if implemented wrong, it can blow up in your face. Hi, I’m Hunter Brockway, founder of Boca Retirement Strategies, here to help set you up for a life of financial freedom and a successful retirement while spending more and avoiding being killed on taxes.

You’ve heard of hiring your child in your business. That’s almost like the OG TikTok financial trend before there was even TikTok. So yes, hiring your child in your business can get you a deduction and your child can potentially earn tax free income. So first, how would your child’s income be tax free?

:round_pushpin: If your child is under age 18 and if the trade or business is a sole proprietorship or partnership and if partnership, then both parents are the partners. Then, your child’s income avoids Social Security, Medicare, and Federal Unemployment Tax. But, they still pay income tax. The tax free, bait click headline comes if the income you pay them stays below tax.

The standard deduction for tax filing. Anything above and beyond that is still taxed as ordinary income. If your business is an S corp or a C corp, there are fewer tax benefits. You still own payroll tax. If you have a corporation, one trendy loophole to get around the solver priority ship slash rule. Is setting up a family management business that is established as a partnership or sole proprietorship and does services for the corporation.

Then hiring the child in the family management business. Personally, to me, that’s a lot of paperwork and a lot of great area. Unless you maybe have. 10 kids and a massive payroll. At the end of the day, these videos can’t be taken as personalized tax advice. Regardless of what type of business you own, your child can still take advantage of the biggest benefit, the eligibility to contribute to a retirement account with earned income.

So let’s make an example. Let’s say that you hire your child at age 10. For 8 years, they set aside 10, 000 per year into a Roth account and invest in the broader markets, earning even a slow 8. 5%. Keep in mind, the S& P 500 historically does around 10%. At 18, they stop contributing, stop working, and go away to school.

They forget about the account and don’t look at it for 47 years while it grows. At age 65, they remember the account, open it up, and are blown away. When they see the power of compound interest accumulated over 5 million tax free dollars, your child can also use their earned income to pay for extracurricular activities, like basketball camp.

So the benefit here being, you pay your child, reduce or potentially avoid income taxes, then they spend that money on things that you were already going to pay for them anyways. Now, keep in mind, they can’t pay you rent to live in your house. The IRS allows you to hire your child, but there are some rules.

Ideally, your child is seven years or older if you implement this strategy. They have to be doing a legitimate job that they can actually perform, such as running your social media, filing, organizing, or mowing the lawn to name a few. They also have to be paid a reasonable rate for the services provided.

So, you can’t pay your child on paper 200 per hour to mow the lawn if you could hire someone else for 40 per hour. But if you pay your child 30 per hour, When the guy down the street charges 40 per hour, that’s probably reasonable. Now, this all needs to be legitimate. They need to be a W 2 employee. They need to have their own bank account to receive funds.

You need to log and track their activities and wages. So, does it make sense for you to hire your child? In most cases, I say yes, but be legitimate. Take action. First, subscribe to our YouTube channel. Next, make a plan for when your child will be hired to your business, what tasks they will perform, and how you will maintain documentation.

I’m Hunter Brockway. Founder of Boca Retirement Strategies. If you’re interested to hear more about how we help our small business owner clients, you can book a no cost, no obligation call on our website at BocaRetirement. com or send us an email at contact at BocaRetirement. com. We are based in South Florida, Western Massachusetts, and work with clients scattered throughout the U.S.

Enjoy your successful retirement and thank you for watching. Bye.