Appearance at 42nd Midwest Writers Workshop

Looking forward to my repeat visit to the 42nd Midwest Writers Workshop at Ball State University in Muncie, IN to talk about the “business side of writing.”  I will be giving classroom lectures on Friday, July 24th and Saturday, July 25th.  I will also be part of a round-table discussion on Saturday morning and have several one-on-one consultation appointments.

The conference is sold out this year.  Lecture topics include “Basic Taxation for Writers” and “Are You a Professional Writer?  Don’t Wait for an IRS Audit to Find Out!”

More about the Midwest Writers Workshop at Twitter @MidwestWriters. or on the web at http://www.midwestwriters.org.

The energy and creativity at this event is awesome!

Tax-Saving Strategy: Sole Proprietors Should Consider Hiring Their Children

By Gary A. Hensley, MBA, EA

If you are operating your business as a sole proprietor (filing Schedule C) then you have a great opportunity to reduce your federal income tax and self-employment tax.  In most states you will also reduce your state income tax.

As a sole proprietor you include Schedule C with your federal Form 1040.  The Schedule C reports the income and expenses of your business.  The net profits from the Schedule C are included in your gross income (on page 1 of your Form 1040) and in your self-employment income on Schedule SE which is also part of your Form 1040.  The income tax is assessed based on your marginal tax rate and your self-employment tax is assessed at a rate of 15.3% on the first $118,500 in 2015 and at 2.9% on the amount above $118,500.

The law allows sole proprietors to hire their children as employees

For those children who have not reached age 18, the law does not require the 7.65% withholding and the employer-matching 7.65% of Social Security and Medicare Tax.  As a result, this is a direct 15.3% family tax savings.  The child must provide a legitimate function necessary to operate the business.  In my opinion, it’s a good idea to write out a list of the child’s duties (responsibilities) and record the days and hours he or she works.  The child must be issued a W-2 form which will report his or her federal wages for the year.  Nowadays, these children are skilled in using computers and analyzing the use of software programs and time-saving skills through the use of data entry, filing, etc.

Tax-saving strategy

In 2015, each taxpayer (including your child) has a standard deduction amount of $6,300.  Don’t confuse their standard deduction with their dependent exemption which you will still get on your return for providing over 50% of their support.

If your child is under age 18 and you pay your child $6,300 for the year, your business income will drop by this amount.  If you, as the parent, are in the 25% federal income tax bracket, this will save you $1,575 (25% X $6,300) in federal income tax and further saves you $963.90 (15.3% X $6,300) in self-employment tax.  This is a total tax savings of $2,538.90 per child.  [Note:  When your child files his or own return (and does not claim a personal exemption since they are your dependent), their wages of $6,300 will be totally offset by their $6,300 standard deduction, leaving them with no federal tax liability on their wages.]

If your child is 18 or older, you will still be allowed to deduct his or her wages of $6,300 on your Schedule C plus your half of the Social Security and Medicare Tax employer match (7.65% = $481.95).  You will need to withhold the employee 7.65% portion from your child’s paychecks.

Contact your tax professional for specific advice related to your personal situation and IRS payroll filing requirement rules.

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Gary A. Hensley is a member of the National Association of Enrolled Agents (NAEA) and can be followed on Twitter @GaryAHensley.