If you’re a sole proprietor, you can shift income by hiring your minor children to help in your business. In addition to providing valuable work experience for your child, this arrangement offers significant tax savings to the business. As long as the work your children do is legitimate and you follow all the rules and they receive reasonable wages, you can deduct their wages as a business expense and shift the money to your children in lower tax brackets.
As an added bonus, if your son or daughter is under age 18, you don’t have to pay Social Security or Medicare taxes on the wages you pay. Because of the standard deduction, in 2010, the first $5,700 earned by each child is not taxed. Also, since it’s earned income, it is not subject to the Kiddie Tax. Just be sure to file W-2 forms and other necessary tax forms for the child. A child claimed as a dependent cannot claim the standard deduction. They can claim a $950 deduction against earned income.
