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You've heard that you can't have your cake and eat it, too. But hiring your own family is one case when you can. Pay your minor or adult children to work for your business, then write it off as an expense.

Many people are confused about whether it's legal to hire their children and grandchildren. Follow my advice to satisfy both the IRS and employment laws - while saving on your own taxes. Assuming it's a true payment for services performed (and the paperwork is handled properly) it's totally legal and acceptable to pay family members.

Minor Children Save the Most Taxes

Child labor restrictions don't apply to a parent (unless it's in manufacturing, mining, or any hazardous occupation defined by the Department of Labor) - even under 16. I hired my own daughters from the ages of 7 and 9 without a hitch.

You need not pay withholding income taxes, payroll taxes (including Social Security) and Workmen's Compensation (in most states) until the child turns 18. Just remember to complete quarterly payroll tax returns, as you must for any employee. Forget about paying federal unemployment taxes until the child turns 21.

However, if your business is an S or C Corporation, you must pay Social Security and Medicare taxes regardless of their ages.

To Survive IRS Scrutiny

1. The children actually have to work 2. Pay them consistently 3. Pay them according to what you'd pay someone else 4. Keep detailed records 5. Issue a W-2 at year end and file a tax return for the child, even if no tax is owed

Example: Wages paid to 13 year old child $6200 Less: Standard deduction for 2005 (5000) Taxable income $1200 Tax Due (10 percent x $1200) $ 120

While for the parents: Wages paid to the child $6200 Tax Savings (40 percent x $6200) $2480

For a net savings to the family of $2360

The income tax standard deduction is $5000 for every person in the country, including each of your minor children. So unless you pay them more than that, they won't have any tax obligation at all. And since they really earned it, the "kiddie tax rules" do not apply.

When hiring adult family members you can justify larger salaries. And they can participate in benefits like qualified retirement benefit programs and fringe benefits (like medical insurance and childcare).

Working for You Teaches Children about Managing Money and Saving

The income has to be earned by the child, so the amount needs to reflect the value of what's done. And the money does belong to them, even if it's being saved for college.

Many of the benefits of involving your children in your operation aren't tax-related at all. They're gaining practical experience, learning the value of work, and maybe how to carry on the family business down the road.

If you're wondering whether to trust my advice, I've sat on both sides of the desk. I worked for the IRS, and since leaving there have conducted almost a thousand seminars on financial planning and taxes. I speak to real estate and banking professionals all over the country, and have found that everyone wants to learn smart strategies that bring reliable financial returns - without getting them into tax trouble. In my opinion, hiring your family is one of them.

Don't hesitate to put the troops to work. When you hire your children you're teaching them skills they'll be able to use for the long haul. They're learning the value of a dollar - and how hard you have to work to earn them. And bottom line, it makes good financial sense as well. © 2005, Chris Bird

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