HIRING THE CHILD

Huge benefits can be yours.

Benefits of Shifting Earned Income from the Parent to the Child:

A child’s earned income is not subject to the Kiddie tax under current law. Instead, the child’s earned income is taxed at the child’s marginal rate. In 2009 and 2010 the tax rate on the first $8,350 of taxable income is 10%. The tax rate on the next $25,600 is 15%. Chances are that these rates are lower than the parent’s marginal tax rate. In 2009 and 2010, the marginal tax rate on taxable income above $357,700 (joint filers) is 35%. That rate is scheduled to increase to 39.5% in 2011.

If the earned income is at least 50% of the amount required to provide support to the child, the Kiddie tax does not apply. This is an opportunity to shift investment income to the child without it being taxed at the parent’s marginal rate. The investment income and capital gains could be $100,000 or more…no Kiddie tax will apply.

The standard deduction for a child claimed as a dependent on a parent’s return is the greater of $950 or the sum of $300 plus the earned income, not to exceed the standard deduction for a single filer, $5,700 for 2009.

If the parents make the election to give up the exemption for the child, the child may claim the various education credits. If the child has a tax liability, the credit may be used instead of going to waste where the parent’s adjusted gross income is above the phaseout range.

To the extent there is earned income in a child’s tax return, a Roth IRA may be set up and contributed to. For example, if the child earned $8,000 in a year, the Roth IRA contribution would be $5,000. The earnings are tax-free if left in the account for at least five years and the child reaches age 59 ½. However, the contributions can be withdrawn tax-free at any time after one year to pay for college.

Shifting income from the parent’s income tax return no only lower their income tax liability, it will lower the parent’s income for financial aid purposes. Parental income is assessed at a maximum of 47%. Since the child’s income over and above the allowances of $3,750 plus taxes is assessed at 50%, the shift is basically a wash for financial aid purposes. If the child’s income is under the allowances, then there is a financial aid benefit.

At public colleges, the only financial aid is loans and work study. Merit and need-based aid is minimal. Therefore, a shift of income from the parents to the child is harmless.
Paying the child for household work might seem silly,  but it does allow the child to contribute to a Roth IRA and it can help beat the Kiddie tax. There are no payroll taxes on household wages up to but not including age 21.

If the parent’s own a car that is used in the business, they might consider buying another car for the exclusive use of the child to use for business purposes. At the end of the year, the parents will need to figure out how much child used the care for personal use. But that situation can be an advantage if the parent’s put the personal use on a W2, as they are supposed to do, and this will transfer personal use into earned income, not subject to the Kiddie tax.


Disadvantages of Hiring the Child:

If the parent’s business is other than a sole-proprietorship or mom & pop partnership, such as a corporation, there is no exemption from FICA/Medicare, FUTA, and state unemployment payroll taxes. If the parent’s business is a sole-proprietorship or a mom & pop partnership and if the child is under the age of 18, then there is an exemption from payroll taxes. The child still is paid as any other employee and a W-2 is issued at yearend, regardless of the legal entity structure.

The Fair Labor Standards Act governs the types of jobs children are allowed to work at and at what age. The federal government also governs the maximum hours during the school year and summers, the frequency of breaks, and the time of day and night a child may be employed.  State laws also govern in this area. It is obviously important not to break the law.

The potential reduction in financial aid must be considered. Obviously, if the parent’s are well-to-do, and are not eligible for financial aid, there will be no loss of financial aid.

For those parent’s who might be eligible for financial aid, this is how the FAFSA calculation works. Assets in the child’s name are assessed at 20%, meaning any financial aid is reduced by 20% multiplied by the child’s assets. Income earned and investment income on the child’s assets are assessed at 50% after certain allowances are deducted from the earnings. Those allowances consist of a flat amount which changes frequently (it was $3,750 for the 2009-2010 school year), federal and state income taxes, and social security taxes. On marginal earnings above the allowances, if the earnings are sitting in an asset account and are present in the child’s name on the date of filing the FAFSA form, the assessment rate is effectively 70% for that base year.

Finding the right combination of earned income, work categories, and timing are critical to maximizing tax benefits.  Your tax and financial advisor can help.


General Guidelines:

Today’s youth are talented and may be able to perform many tasks in the business and/or in the household to create tax scholarships. To preserve the parent’s tax deduction in their business, it is extremely important to observe these general guidelines.

Remember these general guidelines:

•  The student must have the ability and/or experience to perform the work
•   The student must actually perform the work
•   The compensation must be reasonable; comparable pay for comparable work.
•   The student must actually receive the compensation
•   The parent must keep good records
•   The work should be intended to add value to the business or, in the household-perform a task not otherwise expected of the child.

In addition, the Federal Labor Standards Law prohibits children from working

► during school hours
► before 7 am and after 7 pm (except for newspaper delivery)
► more than 3 hours per day
► more than 18 hours a week

During the summer a child cannot work

► after 9 pm
► more than 8 hours per day
► more than 40 hours per week

The paperwork must be produced. W-4s, W-2s, quarterly tax returns such as 941s must be filed. The child may be subject to the state worker’s compensation insurance law and must be insured.
Age restrictions must be adhered to. Even though the IRS may allow wages to a child as young as 7, the federal and state labor laws must be adhered to and their age minimum may be 10 or 11.


Work Categories:

Below are some examples that college planners, CPA’s, and parents may use to enable a discussion of what is realistic for both parent and student.  It is important to give the CPA the last word on the nature of the work, the appropriate compensation, as well as how to integrate the strategies into the family’s overall tax plan.

Administrative Tasks:

• Office filing – subject information & articles, client files.
• Organizing & updating literature & periodicals.
• Clean the office.
• Data entry.
• Keeping books & records for business.
• Preparing weekly, semi-monthly, or monthly payrolls
• Mailings (stamp, stuff, fold and update list)
• IT Support (applies to more parents than you would think)
• Printing custom client reports
• Scanning all doc to “go paperless”
• Weed out old files (such as tax returns) and put them in storage boxes, making lists of the files in each box in case the files are needed at a later date
• Shredding old documents
• Delivering & picking up mail to and from the PO
• Enter Quickbooks transactions from credit card statements (training time should be short)
• Be the receptionist and schedule appointments
• Call clients to schedule appointments, remind them of events
• Maintain office computers, installing software, hardware upgrades
• Transcriptions
• Survey taking
• Hire the student to train the parent how to use technology in their business, such as how to use various features of Microsoft Office, or a smart phone device, or how to get email in a smart phone
• Recycle paper in the office: set up receptacles for clean paper/cardboard/bottles/cans, weekly or monthly bring collection to recycling center
• Send holiday and birthday cards to customers
• Create and/or update and maintain lists of business' clients and prospects
• Mail regular client newsletter
• Proof read materials, letters & correspondence
• Make bank deposits
•  
• Enter database names
• Open e-mail every AM delete junk & set up the bock for co junk (to time consuming for bus owners to block)
• Review incoming mail & sort out junk mail and toss
• Make pickups and deliveries, trips to P O box and bank
• Filing receipts, etc., for future tax use
• Perform weekly/monthly monitor testing of the company's Emergency Lights, be sure fire extinguishers are in the "green" zone and be sure all emergency exit doors are properly accessible and clear of debris.
• Data backup
• Courier service to the Post Office, Bank, Office Supplies
• CAR signage on the student's car with business name and phone number
• In a professional way, have the child answer your phone and take good messages
• The college-age child/student could serve on the company's board of directors, especially appropriate if the child is majoring in business administration, economics, law, accounting, or other major which fits with the parent’s business.
• Label makers: re-label client files with professional looking labels.

Marketing Tasks:

• Establish a legitimate business that is related to the child’s interest or hobbies such as  raising or breeding dogs, rabbits, horses, and pay them for services.
• Use their picture in ads and compensate them accordingly
• Have them record media ads, radio, TV, etc.
• Monitor website analytics
• Design/update a website for the business.
• Art work and desk-top publishing of business cards and brochures
• Data entry such as seminar responses and keying in and keeping track of you marketing information
• Personal brochure;  children  model for a few shots.
• Call and do client satisfaction surveys
• Set up seminars
• Greet attendees at seminars- register them and give handout materials
• Updating blogs with prepared information
• Event Coordinator
• Use the student’s photos in marketing brochures and pay them royalties
• Send child to local community college for computer training and have them provide IT services (section 127 or 132(d) plan)
• Handing out flyers, creating ad campaigns, collecting and distribution through mailers or e-mail blasts
• Creating distributing marketing publications in school sporting or theater programs that helps attract potential clients.
• Design a website
• Film a promotional video for YouTube
• Pre-travel assistant:
• Research and confirm lodging for upcoming tradeshow or seminar, mapquest directions, arrange perk points redemption with credit card companies for payment of air, rental and lodging.
•  Implement, monitor a newsletter
• Virus scanning the office software
• Coordinate and implement music on hold marketing (no time for owners to do it)
• Investigate direct marketing campaigns (Call current users and get the true stories)
• Design/update literature
• Presentation assistance (running a projector)
• Website photography and graphics
• Design a blog website and write some or all of them
• Create powerpoint presentations
• Set up Facebook, Twitter and MySpace marketing
• Put children on the website to promote family values and pay a modeling fee

Investment Property Maintenance Tasks:

• Mowing lawn / snow shoveling / general lawn care
• Snow removal
• Business car washing & vacuuming
• Window washing
• Power wash the walks and drives around your business
• Find the best deals for office supplies and equipment online and make the purchase.
• Perform maintenance on computers, printers, scanners, etc.
• Manage investment real estate
• Patrol the outside of a business' premises, making sure all doors are locked and all "out-buildings" are secure.

Investment portfolio oversight:

• Researching and filtering via firms allocation modeling system
• Mutual funds and stocks and organizing the info into allocation spreadsheets.
• Monitoring and updating charts if you are using technical analysis
• Organizing and prioritizing investment alerts
• Researching college websites
• If you have an investment portfolio – hire the child to do research and monitor announcements regarding companies in your account.
• Learning about financial advisory type software, then teaching it to parents.
  

 
Household:

• Have the student take monthly utility readings of the gas, water & electric meters to check against the utility companies' bills.
• Organize daily mail – separate junk out, distribute to family members, file bills to pay
• Pay bills online
• File bank & investment statements in binders
• Mow the lawn
• Clean the house
• Balance the family checkbook
• Washing cars
• Pet grooming
• Recycling
• Light car maintenance (washing, oil changing, etc.)
• Landscaping
• Painting
• Roofing
• Filing assistant for family documents
• Resource planner; family logistics
• Balance the family checkbook
• internet for best deals on home, auto and life insurance
• Computer networking (wireless setup)
• Data Back-up services
• Organize all the documents needed for the IRS tax return, including the home improvement receipts (which may have to be research back ? years)
• Baby sitting younger sibblings
• Vacation planner, groceries shopper, yardwork, car wash
• Scan and archive family photos, slides.
• Maintain the pool all year
• Care for houseplants
• Clean maintain fish tanks
• Shopping or preparing meals (using household budget to pay child for services rather than incur costs of eating out)
• Snow shoveling, yard maintenance or landscaping, keeping a my space or face book profile current,
• Be a driver to school for siblings