Are you Interested in Generating Some Extra Cash?


PUTTING YOUR CHILDREN ON THE PAYROLL

Have you considered putting your children to work in your business? Of course there's the usual chores, which are very important. But if you can put your children to work part time in your business, there will also be a nice financial payoff.

For instance, you can put your daughter on the payroll for 10 hours during the week, and six more hours on the weekend, serving as a messenger, assisting with incoming phone calls, and doing some landscaping. If you pay her $7 an hour, she will earn $112 a week, or $5,600 a year; assuming a two-week unpaid vacation. The advantage is the salary will be deductible by your business, in effect eliminating $5,600 of income from taxation. In addition, you don't lose the exemption for that child if you continue to supply over half of her support. (And we are assuming that the child has no unearned investment income.)

If your child can be claimed as a dependent, no tax will be due on income under $3,600 (the standard deduction for a dependent child). If your child cannot be claimed as a dependent, the $5,900 personal exemption will apply.

It is important to check your specific situation with your business accountant, but in general the child can be claimed as a dependent if under 19, or under 24 and a student. For 1992, any income over the $3,600 or $5,900 and up to $21,500 would be taxable to your child at approximately 15%, after which the rate climbs gradually. Figures may be different for the current year, because rates could change during the year, but at these low brackets the actual figures will not vary by much, and the principle remains the same. Both employer and employee are liable for Social Security and state unemployment taxes on the income, under any circumstances.

If your child's income exceeds the tax free amount, consider setting up an individual retirement account (IRA). He or she would be able to contribute to the IRA and deduct the lesser of $2,000 or the amount of compensation. By using an IRA, you could have up to $5,600 or $7,900 of income ($3,600 or $5,900 exempt and $2,000 in an IRA) without any tax.

The child, though, must have real work to do -- she must perform sufficient duties to earn that salary. Otherwise, the IRS will treat the salary as income to you and a gift by you to the child.

Check with your attorney or state department of labor concerning child-labor laws. Commonly there is an exemption for children employed in a business owned by the parents if the children's work is not hazardous.

None of this is affected by whether or not you are eligible to take a home office deduction; it is a matter of whether the child is actually working for the business.

Warning: Building up assets and income in the child's name (especially in the last two year's of high school) can sharply reduce eligibility for college financial aid.