Biggest LLC Write Offs: How Hiring Your Kids can Help You Avoid Taxes in an LLC Sole Proprietorship

Is there any advantage to hiring your kids in your business?

Yes.

What’s the Biggest Write off for a Sole Prop?

The biggest write offs have to do with pro-active tax planning, things you’ll do during the year.

What are the Biggest deductions for self employed schedule C

SEP IRA or SOlo401k Retirement Plan Contributions.
Owning rental property.
Becoming an S-Corp to reduce self employment taxes
20% self employment deduction from the Tax cut and Jobs Act

Biggest Write off for a Sole Prop Could Be Hiring Your Child

First off, read Sandy Botkin’s Book, read his stuff on his blog here

All right, well, hey everybody, Rob Satrom here from FeedbackWrench and today I’m going to tell you how to take control of your taxes in a unique way when it comes to if you are taxed as a sole proprietor.

If you just make side income or if you own your own little home business, maybe you’re in a direct marketing or maybe you’re a designer or you do freelance work or something like that, or even if you just have a small home business or even a kind of a bigger home business, I’m going to show you how you can hire your kids to save a ton in taxes, which is something that you probably didn’t know. Can you hire your kids and will it help you save taxes? Can you hire a spouse and will that help you to save taxes?

Well, we’re going to answer that, so before we start off here, what I want you to know, this is not legal tax advice. I am not your CPA. You need to consult a professional, but that’s what this is all about. I’m going to talk about strategies on this channel that you can bring to your tax professional and say, Hey, I want to implement this. Because what you probably don’t know is, you know it’s tax season right now, when you show up to your tax professional and you hand them your paperwork, it’s already too late to take control of what you’re going to end up paying in taxes.

All right, so here’s the deal. You know when it comes to tax mitigation, you really have three giant strategies, right? The three primary strategies are looking at whether you should be an S corp, using retirement plans, and then real estate. Those are the big hitters, but there is a set of extra things, whether it be fringe benefits or this strategy, income shifting. This is something where you got to get a little more in, you have to keep good records. A, you have to know what the laws are, B, and you’re going to want to use a tax professional to get the final answers on this. But here’s the deal.

All right, so remember there’s kind of two types of company or two types of taxation when it comes to your company. You’re either taxed as a sole proprietor or you’re taxed as a corporation or an S corporation. So you can be an LLC when it comes to the law and you get that limited liability protection and you can be taxed as a sole prop or an S corp. This tax mitigation strategy, you can hire your kids. Here’s why this is such, is when you hire your children under the age of 18 in a home business, not a corporation, you do not have to pay and file Social Security taxes for them. So you don’t have to withhold Social Security taxes. So that’s a 15.3% savings right there. Not only that, but if you pay them up to the standard deduction, which, you know, in 2018 was $12,000 they won’t pay any taxes and then on top of that, the next tax bracket, you’re only going to pay 10% taxes. So if you think about it, the first $12,000 in 2018 was tax free. You’re not going to pay anything.

All right, so remember there’s kind of two types of company or two types of taxation when it comes to your company. You’re either taxed as a sole proprietor or you’re taxed as a corporation or an S corporation. So you can be an LLC when it comes to the law and you get that limited liability protection and you can be taxed as a sole prop or an S corp. This tax mitigation strategy, you can hire your kids. Here’s why this is such, is when you hire your children under the age of 18 in a home business, not a corporation, you do not have to pay and file Social Security taxes for them. So you don’t have to withhold Social Security taxes. So that’s a 15.3% savings right there. Not only that, but if you pay them up to the standard deduction, which, you know, in 2018 was $12,000 they won’t pay any taxes and then on top of that, the next tax bracket, you’re only going to pay 10% taxes. So if you think about it, the first $12,000 in 2018 was tax free. You’re not going to pay anything.

So whatever tax bracket you’re in, if you pay your kid, now there’s rules here, you pay your child for participating in your business, a reasonable wage for what they’re actually doing, you’re going to be omitting taxes. So if you’re in a 35% tax bracket plus your Social Security and Medicare, then you’re going to be able to shift this or, you have to consult your tax professional. There’s more to this than what I’m saying, but you got to take responsibility for doing this.

All right, so if you hire a kid, there’s tax law that Sandy Botkin’s book talks about that, as long as they’re over the age of seven, there was a new tax case where the IRS went really hard and found out that your kid probably needs to be at least seven years old, A. B, you’re going to have to file the same paperwork as you would as a normal employee. You’re actually going to hire them in your business. So they’re going to have a W-2, a W-4, 941s, 940s, you have to fill out all of that, right? But as long as they’re under the age of 18 and they’re your children within your family and you’re taxed as a sole proprietor, you can pay them in your business and you won’t pay Social Security and you won’t pay income ta. Then everything above 12,000, the first $9,000 and that, so up to like 22,000 and it’s probably more now I’d have to go double check is basically tax free and then 10% tax, that’s really low. So if you’re in a higher tax bracket, this is great.

Now what you need to do is you need to describe what they’re doing. You need to hire them for an actual position. So you should go find out if they’re going to be cleaning your car as a Lyft and Uber driver, if they’re going to be doing some bookkeeping for you, if you have a property then it’s schedule E instead of schedule C, but just remember those wages that you invest are going to be deductible to you, right? But you have to find out what they’re doing. Describe what they’re doing. You should probably get an attorney to draft up a little employment agreement, right? You should definitely take into consideration their experience and what they’re doing. It’s the same stuff that when you’re an S corp and you want to find out how much you should take as a reasonable salary, you need to apply this to when you hire a kid. So, long story short, you hire your kid when you’re not an S corp but you’re taxed as a sole prop, they’re under 18 you should take into consideration that they’re 12 years old or 11 years old, but you can make them marketing people, they can manage your social media, and they could clean your car, they could help with bookkeeping, they could help clean up your offices, they can mow your lawn, they can do your landscaping, they can do all sorts of stuff.

The key is you need to document everything, document the hours that they worked, document the pay, document the agreement, document what they did. You should have a file on them and then when you pay them make sure you pay with a written check and you need to get them a bank account. So if they’re under age, you’re going to have to get a bank account where you’re the, I can’t remember what it’s called, but it’s a custodial account, right? So get them a custodial bank account and make sure that you have an official transaction using a written check so that there’s this paper trail of what’s going on. You can even write notes. You just want to over-document this because there’s a lot of tax law about this, but I’m telling you hire your kids, this is perfect for those freelancers.

I’m Rob Satrom, I hope that was helpful.

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