If you are self-employed, you may be interested in the tax benefits available to you by hiring family members. Sound too good to be true? As long as you follow the rules, it is relatively easy to take advantage of these tax deductions.
Income Tax Benefits
By placing family members on the payroll, you can take a full deduction for their compensation, as you would with any other unrelated employee. What’s more, if the person you hire is your dependent child, you could be eligible for additional tax savings, as their income is generally taxed at a much lower rate than yours. If you are a sole proprietor, you do not pay FICA on those wages, if the child is under age 18, nor do you pay unemployment taxes if they are under age 21. For 2012, a child could receive a standard deduction of up to $5,950, plus be eligible for as much as a $5,000 IRA deduction (if they contribute the maximum amount to an eligible IRA). This scenario should allow for $10,950 of tax free income.
The Rules On Employing Family Members
The rules are very reasonable and simple to follow. First and foremost, the family member must actually perform services for the company. Secondly, the compensation paid must be reasonable in relation to the duties they are performing.
Insurance Benefits
You could provide a family member employed by your business with group-term life insurance coverage and receive a deduction of up to $50,000 for the cost of the coverage. Furthermore, if the family member employee wishes to purchase coverage with a cost in excess of $50,000, the premiums generally will be less than if the employee purchased a policy on his own. However, coverage premiums in excess of $50,000 paid by the employer results in a taxable benefit to the employee.
Child and Dependent Care Expenses
If you employ your spouse, who otherwise would not have any earned income, you could become eligible to take the child care tax credit. In order to claim this credit, both parents must be employed or seeking employment, and the child must be under age 13. You can only claim up to a maximum of $3,000 in child care expenses ($6,000 for the care of two or more children). Then, depending on how much you and your spouse earn during a particular year, the credit is limited to a maximum of 35% of the expenses incurred.
Business Trips
If your spouse accompanies you on a business trip, under no circumstances can their travel expenses be deductible business expenses. However, if they are an employee of the business and have a bona fide business purpose for the travel, their travel expenses are fully deductible.
Social Security
If your spouse is currently not earning the maximum social security amount, your business could employ them and pay them a salary; thereby, increasing their future social security benefits.
For more information regarding this topic or any other tax related issues, contact Henssler Financial at 770-429-9166 or experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
