If you are self-employed, you may be interested in the tax benefits available to you by hiring family members. Sound too good to be true? As long as you follow the rules, it is relatively easy to take advantage of these tax deductions.
Income Tax Benefits
By placing family members on the payroll, you can take a full deduction for their compensation just as you would with any other unrelated employee. What's more, if the person you hire is your dependent child, you may be eligible for additional tax savings as their income is generally taxed at a much lower rate than yours. If you are a sole proprietor, you will not have to pay FICA on those wages if the child is under age 18, nor will you have to pay unemployment taxes if they're under age 21. For 2008, a child could receive a standard deduction of up to $5,450, plus be eligible for as much as a $4,000 IRA deduction (if they contribute the maximum amount to an eligible IRA). This scenario would allow for $9,450 of tax free income.
The Rules On Employing Family Members
The rules are very reasonable and simple to follow. First and foremost, the family member must actually perform services for the company. Secondly, the compensation paid must be reasonable in relation to the duties they are performing.
Insurance Benefits
You may be able to provide a family member employed by your business with group-term life insurance coverage, and receive a deduction of up to $50,000 for the cost of the coverage. Furthermore, if the family member-employee wishes to purchase coverage with a cost in excess of $50,000, the premiums generally will be less than if the employee purchased a policy on his own. However, coverage premiums in excess of $50,000 paid by the employer results in a taxable benefit to the employee.
Child and Dependent Care Expenses
If you employ your spouse, who otherwise would not have any earned income, you could become eligible to take the child care tax credit. In order to claim this credit, both parents must be employed or seeking employment, the child must be under age 13, and you can only claim up to a maximum of $3,000 in child care expenses ($6,000 for the care of two or more children). Then, depending on how much you and your spouse earn during a particular year, the credit is limited to a maximum of 35% of the expenses incurred.
Business Trips
If your spouse accompanies you on a business trip, under no circumstances can their travel expenses be deductible business expenses. But, if they are an employee of the business and have a bona fide business purpose for the travel, their travel expenses are fully deductible.
Social Security
If your spouse is currently not earning the maximum social security amount, your business could employ them and pay them a salary, thereby, increasing their future social security benefits.
For more information regarding this topic or any other tax related issues, please call The Henssler Financial Group Tax & Accounting Division at 770-428-4025.
