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As you likely know, there are many articles and youtube videos with some discussion of your business hiring your children as W-2 employees.
The hire-your-child strategy works best for the Schedule C proprietorship because when the proprietor hires his or her under-age-18 child, the tax code exempts both the child and the proprietorship from payroll taxes.
That’s great for proprietorship owners who have children under age 18. But f you hire your child and operate as a corporation or your child is age 18 or older, both you and the child incur payroll taxes.
This article gives you a strategy to avoid payroll taxes on children over age 18 and on children doing work for your corporation.
Hiring Your Child of 18 Years or Older
The Supreme Court ruled in Batok (T.C. Memo 1992-727) that John Batok’s windows installation did not rise to a trade or business level. Mr. Batok’s activity, although engaged in for profit, was neither continuous nor regular, and he had never installed windows before this effort nor at any time after that, a “one-time job” not subject to self-employment taxes.
Let’s say that you could pay your child $23,225 with this strategy:
- You deduct the $23,225 in your high tax bracket.
- Your child pays $1,028 in income taxes.
That is an excellent return on investment.
Your child pays $1,028 in taxes.
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