Should You Put Your Family Member
on the Payroll?
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True, the IRS would probably frown if you were to hire your three-year-old child to work for your business.
Retirement Plan Coverage. Employees can receive tax-favored retirement benefits. And these can be substantial. For example, the law may allow an employer to provide a minimum defined benefit pension of $10,000, even to individuals who never earned that much in annual pay. If you qualify, you could set up a tax-deferred pension plan through your business, deduct contributions to the plan, and provide your spouse this benefit upon retirement.
Health Coverage. Despite recent changes in the law, self-employed business owners still can't deduct the full cost of their individual or family health coverage. In 1998, the deduction is limited to 45% of eligible expenses. If, however, you were to provide family coverage through your business and have your employee/spouse sign up for the plan, you'd be able to deduct the full cost of the coverage as a business expense.
SE Tax Savings. A big yearly expense for self-employed business owners is the 15.3% self-employment (SE) tax for Social Security and Medicare. Paying salary to your children can reduce your SE tax burden by reducing the amount of earnings subject to the tax. As long as the child is under age 18, no FICA taxes would be due on his or her wages.