Here’s a summary of this video:
The main benefits of hiring your kids:
Tax-rate arbitrage: You shift income that would otherwise be taxed at your top marginal rate (up to 37%) into your children’s lower tax bracket. The first $14,600 they earn (in 2024) is tax-free federally if it’s within the standard deduction.
Employment-tax exemption: wages paid to your children under age 18 by a sole proprietorship (or by a partnership where both partners are the child’s parents) are exempt from Social Security, Medicare, and FUTA taxes. This saves you up to 15.3% in employment taxes.
Wealth-building strategy (example):
Pay your child $8,000 per year (must be reasonable for the work they perform).
This wage would be federally tax-free due to the standard deduction
Your child can contribute up to the annual Roth IRA limit ($7,000 in 2024).
You could also set up a SEP-IRA and contribute up to 25% of their compensation, subject to IRS limits. Under Secure 2.0, SEP-IRA employer contribution can now be designated as ROTH, if the plan allows and the employee (your child) elects it. This enables additional after-tax contributions to grow tax-free in retirement.
If you repeat this for eight years, and the account earns 10% annually, it could grow to roughly $1 million by age 40!
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