Employing a Family Member

A way to reduce the overall family tax bill is by employing family members through your business, which allows you to shift income to them and provide them with employment benefits.

· Employing your Spouse. Reasonable wages paid to your spouse entitle you to a business deduction. Although the wages are subject to income and FICA taxes, your spouse may qualify for Social Security benefits to which he or she might not otherwise be entitled. In addition, your spouse may also be entitled to receive coverage under the qualified retirement and health plans of your business, allowing you to obtain business deductions for contributions to your spouse’s retirement nest egg and health insurance premium payments made on behalf of your employed spouse. While maintaining the same family medical care coverage, you increase your business deductions by providing your spouse with family health insurance coverage as an employee.

· Employing your child. By employing your child, the income tax advantages include obtaining a business deduction for a reasonable salary paid to that child, thus reducing your self-employment income and tax by shifting income to the child. Since the salary paid to your child is considered earned income, it is not subject to the “Kiddie Tax” rules that apply to children under the age of 19, as well as some older children. The maximum standard deduction available to your child in 2013 is $6,100 (up from $5,950 in 2012) if he or she has at least that amount of earned income. Therefore, the standard deduction eliminates all tax on this income if you pay your child $6,100 (2013) in compensation. If your business is unincorporated, wages paid to your child under age 18 are not subject to social security taxes. Not only are there significant income tax advantages to employing your child, you may also provide him or her with fringe benefits such as group-term life insurance and qualified pension plan contributions.

Any type of business such as medical, professional, real estate and etc. can hire a family member and any entity as well such as a sole proprietorship, an LLC, partnership, a S or C corporation or a trust.

Your child may also make deductible contributions to an IRA of the lesser of earned income or the annual limitation. These contributions can offset earned and unearned income. As example, in 2013 your child could receive $11,600 gross income ($6,100 earned and $5,500 unearned) by combining the IRA deduction ($5,500) with the standard deduction ($6,100) and pay no tax. You should consider giving him or her part or all of the money needed to fund the IRA (as part of your $14,000/$28,000 annual exclusion for gifts) if your child does not want to use his or her earned income to fund an IRA contribution.

Your child can then withdraw money from his or her IRA account to pay for his or her college expenses. The money that he or she withdraws from their IRA account will be taxable but will not be subject to the early withdrawal penalty. However, most likely your child will not have any other source of income while going to school. Therefore, the amount that is taxable will first be offset by your child’s standard deduction and perhaps their personal exemption. Then any amount over those two deductions will be taxable and most likely at the lowest federal and state tax rates.

It is actually a great way to save for your children’s college expenses and get a tax deduction for it too.

Please keep in mind that, when you employ a family member through your business, the wages should be reasonable for the work performed and that the services performed are necessary to the business. Please call this office for additional information.

The above technical reference is provided as a courtesy to the reader by David Silkman, CPA, MST, Broker, Silkman & Associates Accountancy Corporation and SilkRoad Realty, Inc. The information is technical in nature, may not include all the details on a particular subject and may require review of the reader’s circumstances by a professional. You should consult with your tax advisor.

David S. Silkman is a CPA, has a Masters in Taxation (MST) and is a licensed real estate broker. He specializes in real estate tax laws and accounting. If you have any questions, please do not hesitate to call him at 310.479.7020 x301, email him or visit Thank you.