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28 Aug 2023

Unlocking the Kiddie Tax Code: Strategies for Paying Your Junior MVPs!

In the realm of tax planning, businesses are constantly seeking legitimate strategies to optimize their financial position while adhering to legal requirements. One such strategy gaining attention is the concept of paying your children under the age of 18 through a family management company. This approach, especially effective for S Corporations, presents a compelling tax advantage where the S Corp can claim the payment as an expense, while your child does not have to file a tax return.

Leveraging Family Management Companies

A family management company is a separate legal entity that acts as a management entity for multiple family businesses. It provides management services to other family businesses and charges them for its services. In the context of paying children under 18, a family management company can employ the child and provide legitimate services that align with their abilities and contributions.

Tax Advantages for S Corporations

For S Corporations, this strategy offers a distinct tax advantage. By employing a child under 18 through a family management company, the S Corp can deduct the child’s wages as a business expense. This effectively reduces the S Corp’s taxable income, resulting in potential tax savings. Furthermore, the child’s wages are typically subject to lower tax rates than those of the parent, further enhancing the tax benefits.

Benefits for the Child

From the child’s perspective, this strategy offers a unique opportunity to earn income without being subject to a significant tax burden. In many cases, the child’s income falls below the threshold that requires them to file a tax return. Therefore, the child can earn income while remaining exempt from filing requirements, providing them with an early financial education and experience.

Considerations for Implementation

While the tax advantages of paying children under 18 through a family management company are apparent, careful implementation is crucial to ensure compliance with tax laws and regulations. Here are some considerations to bear in mind:

  1. Legitimate Services: The family management company must engage the child in legitimate services that align with their abilities and contribute to the business’s operations. Documentation of services provided is essential to substantiate the legitimacy of the arrangement.
  2. Reasonable Compensation: The wage paid to the child must be reasonable for the services rendered. The compensation should be consistent with what an unrelated third party would pay for similar services.
  3. Recordkeeping: Accurate and comprehensive recordkeeping is vital to support the business expense deduction. Keep records of the services performed, hours worked, and compensation paid to the child.

Consultation and Professional Guidance

Approach this strategy with caution. Given the complexity of tax regulations and the potential implications of this strategy, seeking professional guidance is paramount. Tax professionals, financial advisors, and legal experts can offer insights and ensure proper compliance with all legal requirements. Partnering with tax advisors specializing in tax-efficient strategies, such as Better Accounting, can provide businesses with the expertise needed to implement this strategy effectively and reap its benefits while adhering to regulatory guidelines.

Maximizing Tax Efficiency

Paying children under 18 through a family management company offers a unique tax planning opportunity for businesses, particularly S Corporations. By structuring payments as legitimate business expenses, businesses can reduce their taxable income and potentially realize significant tax savings. Simultaneously, the child can earn income without facing substantial tax obligations.

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