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I wanted to start a separate thread for this to not clog up the other tax thread that was ongoing. @Lyinx was asking some good questions, so here is a brief summary.
One of the biggest benefits of having your own business is being able to tax-plan more efficiently/effectively. We all hear "the wealthy have tax loopholes and havens" - but what about smaller businesses?
One "trick" is to hire your kids. Standard disclaimer: this is generic advice, and you should check with your CPA before doing this.
If you have a sole proprietorship or a single-member LLC that is taxed as a disregarded entity (i.e. you have not made an election to be taxes as an S or C Corp), or a partnership where both partners are the parents of the child being hired, then you do not pay Medicare/SS taxes on wages paid to a child under age 18 (you also don't pay FUTA on a child under 21).
Let's also keep in mind that the standard deduction for 2020 is $12,400.
So how does this work in real life?
Let's say you have a manufacturing business. You decide you want your 16-year old to work on the floor with you. You decide he's old enough to run a machine, or organize the warehouse, or whatever other task needs done.
You then must determine a reasonable wage for those tasks. Let's say a machine operator makes $15/hour.
If your kids works 15 hours a week all year, then he makes $15/hr * 15 hrs * 52 weeks = $11,700.
Since you as his parent have hired him, you pay no Medicare or Social Security tax on his wages. Since he is under the $12,400 standard deduction, then you've (hopefully) not withheld any income tax so he doesn't even need to file a return.
Now you've moved $11,700 from your high income tax bracket to a 0% income tax bracket, potentially saving yourself (and family) $11,700 * 35% = $4,095 in income taxes (plus these wages are no longer subject to self-employment taxes on your income tax return).
But wait, it gets better!
Maybe, he decided to work full time instead of part time, so he earned $15/hr * 40 hrs * 52 weeks = $31,200.
Still no Social Security or Medicare tax, since he's your child under 18 years of age. And let's assume that your business has a 401k in place that he put the maximum $19,500 for 2020 into.
Since the $19,500 401k contribution reduces his income to $31,200 - $19,500 = $11,700, which is below the standard deduction of $12,400, he still pays no income tax.
Now you've moved $31,200 from your high income tax bracket to a 0% income tax bracket, potentially saving yourself $31,200 * 35% = $10,920 in income taxes.
And even better, maybe your company matches 401k contributions to employees, an additional deduction from your business taxes with no income tax consequences to your employee/child.
These "tricks" still work even if you have a partners/S Corp/C Corp, you'll just need to evaluate if the 15.3% in Social Security/Medicare tax makes it work it (and it most likely does).
(also, note I have not factored in state taxes for obvious reasons)
ETA: US only, obviously.
One of the biggest benefits of having your own business is being able to tax-plan more efficiently/effectively. We all hear "the wealthy have tax loopholes and havens" - but what about smaller businesses?
One "trick" is to hire your kids. Standard disclaimer: this is generic advice, and you should check with your CPA before doing this.
If you have a sole proprietorship or a single-member LLC that is taxed as a disregarded entity (i.e. you have not made an election to be taxes as an S or C Corp), or a partnership where both partners are the parents of the child being hired, then you do not pay Medicare/SS taxes on wages paid to a child under age 18 (you also don't pay FUTA on a child under 21).
Let's also keep in mind that the standard deduction for 2020 is $12,400.
So how does this work in real life?
Let's say you have a manufacturing business. You decide you want your 16-year old to work on the floor with you. You decide he's old enough to run a machine, or organize the warehouse, or whatever other task needs done.
You then must determine a reasonable wage for those tasks. Let's say a machine operator makes $15/hour.
If your kids works 15 hours a week all year, then he makes $15/hr * 15 hrs * 52 weeks = $11,700.
Since you as his parent have hired him, you pay no Medicare or Social Security tax on his wages. Since he is under the $12,400 standard deduction, then you've (hopefully) not withheld any income tax so he doesn't even need to file a return.
Now you've moved $11,700 from your high income tax bracket to a 0% income tax bracket, potentially saving yourself (and family) $11,700 * 35% = $4,095 in income taxes (plus these wages are no longer subject to self-employment taxes on your income tax return).
But wait, it gets better!
Maybe, he decided to work full time instead of part time, so he earned $15/hr * 40 hrs * 52 weeks = $31,200.
Still no Social Security or Medicare tax, since he's your child under 18 years of age. And let's assume that your business has a 401k in place that he put the maximum $19,500 for 2020 into.
Since the $19,500 401k contribution reduces his income to $31,200 - $19,500 = $11,700, which is below the standard deduction of $12,400, he still pays no income tax.
Now you've moved $31,200 from your high income tax bracket to a 0% income tax bracket, potentially saving yourself $31,200 * 35% = $10,920 in income taxes.
And even better, maybe your company matches 401k contributions to employees, an additional deduction from your business taxes with no income tax consequences to your employee/child.
These "tricks" still work even if you have a partners/S Corp/C Corp, you'll just need to evaluate if the 15.3% in Social Security/Medicare tax makes it work it (and it most likely does).
(also, note I have not factored in state taxes for obvious reasons)
ETA: US only, obviously.
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