It’s only normal for parents to want to do whatever they can to support their kids. Paying their child for labor done in the home or family business is one way some parents choose to do this. But the question is, is it legal to give your kid $12,000 a year?
Yes, you are allowed to give your child $12,000 every year. Children under the age of 18 who work for their parents’ company are subject to the same laws and restrictions as any other employee, according to the IRS. This means that as long as the labor is legal and the money is appropriate for the work accomplished, you are allowed to give your child a fair salary for any work that is completed.
It’s crucial to understand that giving your kid a paycheck may have tax repercussions for both you and him or her. If you run your own business, paying your kids can help you lower your taxable income while also giving them a source of money. The “kiddie tax,” which applies to income earned by children under the age of 18, meaning that if it exceeds a specific level, it is taxed at the same rate as the income of their parents.
When paying your child, there are additional considerations to keep in mind in addition to the tax ramifications, such as the business’s legal structure. For liability protection and tax advantages, many companies opt to operate as Limited Liability Companies (LLCs). Operating as an LLC has drawbacks, such as more paperwork and more legal fees.
An LLC’s drawback is that it could be more challenging to transfer assets. A member of an LLC usually leaves their portion of the company to their heirs when they pass away. However, this can be a difficult procedure that calls for counsel.
Whether you can sell your home to your LLC also comes up when thinking about paying a child. Although selling your home to your LLC is technically possible, it’s crucial to think about the potential drawbacks. For instance, you might not be eligible for certain tax deductions that you would be if you owned the property outright if you sell your home to your LLC and then rent it back from the LLC.
Finally, you should think about whether you should consolidate all of your assets into an LLC. Although an LLC can offer liability protection and tax advantages, it might not always be the best option. The ideal strategy to arrange your assets should be discussed with a financial advisor or lawyer.
In conclusion, paying your child $12,000 a year in wages is acceptable as long as the employment is legitimate and the compensation is appropriate. Before making any decisions, it’s crucial to take your company’s legal structure and tax ramifications into account. Although having an LLC has advantages, there are also drawbacks to take into account, such as more paperwork and costs. Before making any decisions about your company or assets, it’s crucial to seek competent advice.