The eighth in a series of training articles entitled, Training for Success with Your Internet Business, This article covers Payments to Children, and is a must read for all business owners, whether they are operating an on line home based business, or a regular home based business. The tips and suggestions are provided from real life situations as seen and experienced by the author.
Stop giving your child or children a non deductible allowance! Instead, take advantage of one of the most remarkable tax-saving strategies available to home based businesses, one that is right under your own roof. The tax saving strategy to which I refer is perfectly legal in most tax jurisdictions.
Just employ, your son or daughter, under the age of 21, in your business and pay him or her wages. (You could also hire your spouse, but your tax savings likely won't be as great.) How does this save you taxes? Wages are taxed at your child's tax rate and receive the benefit of the full standard deduction. Looking at this kind of action, purely from a tax point of view, it's better to pay a child wages than to give him an income-producing gift, such as shares in a stock mutual fund.
Furthermore, because your child's salary is deductible as a business expense, you also reduce your net profit for the business and pay less tax. But that's not all. Wages paid to your child are exempt from employment taxes. The effective cost of employing your minor child rather than a non-family member is, therefore, much less. Further, paying your minor child a salary doesn't cost you his exemption, provided you don’t pay him or her too much.
When I say employ, above, I mean that they must do something in and for the business such as photocopying, filing, making phone calls etc. and the payment made must be reasonable. Once again keep a log of the work that you are paying them to do, or keep detailed information on their time cards so that it is available for the tax authorities if they require them.
Although not essential, treat them like any other employee and pay them by cheque so that there is a paper trail of your transactions with them.
Note: Taxation legislation differs between countries and each country may change their rules at any time. The information provided in these newsletters is accurate at time of publication. You should however seek specific information from your Tax Advisor or Taxation Department as it relates to your own situation each year that you are required to provide Income and Expense Statements.
John Ritchie,
Copyright to this article belongs to John Ritchie.
http://www.johnritchieonline.com/
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