Strategy 63 of 107
Business owners: pay your children for real work
What it is
In a sole proprietorship or a partnership of only the parents, wages to a child under 18 are not subject to Social Security and Medicare tax.
Steps
- In a sole proprietorship or a partnership of only the parents, wages to a child under 18 are not subject to Social Security and Medicare tax.
- Pay a fair wage for real work, keep timesheets, and file payroll forms.
- The tax saved goes to principal; the child's pay is theirs.
Repeat: Every year.
Measure: Tax saved (enter as a yearly amount).
Try it in the calculator Enter its amount in "Yearly amount to principal". Add a payoff goal of 5 years to see what is still needed.
Risks
- The work must be real and the pay reasonable.
- The rule does not apply to corporations.
Who it fits
Business owners
Needs
Owns a business or is self-employed
How predictable
Depends on people or program rules (tenants, family, IRS records, lenders)
A worked example (hypothetical, not guaranteed)
Picture a hypothetical household (business owners). They owe $300,000 at 6.5% with 30 years left. The required payment is $1,896 a month, and that payment, which comes from income, never changes in this example.
They follow the steps: in a sole proprietorship or a partnership of only the parents, wages to a child under 18 are not subject to Social Security and Medicare tax.
Suppose it brings $6,000 once a year on principal. The loan would be paid off in 17 years 11 months instead of 30 years, saving about $173,949 in interest. To finish in five years, they would still need about $3,488 a month more from other strategies. That is why the five-year sequences stack several at once.
The amount above is chosen only to show the arithmetic. It is not an estimate of what this strategy will produce for anyone. Put real numbers from the fact finder into the calculator.
Sequences that use it
- Self-employed tax stack: Legal deductions for the business use of the home and family work. Keep records for every one.
Sources and more information
- IRS: Family employees irs.gov
Where to get help
Related strategies
- 62. Self-employed: take the home office deduction and send the tax saved to principal
- 64. Selling another property? Carry the note and route its payments to principal
- 61. Merge households: a parent sells, moves in and shares the costs
- 65. Bank account sign-up bonuses, without credit pulls
- 69. Rent the whole house out and live somewhere free or cheaper
- 70. Move into the accessory unit and rent the main house