Pay Your Kids – It Pays at Tax Time

I remember working on our wheat and pea farm for my parents when I was in high school.  During spring, I would help plant the peas.  During harvest, I drove the combine for about 3 to 4 weeks depending on the yields, weather and how much custom cutting we did.  In the fall, I would help plant the winter wheat.

During all of these years, my mother, who did the taxes made sure that my brother and I were paid at least enough wages to make sure that they had the best tax deduction at year-end.

In 2009, self-employed family farms can pay all of their minor children up to $5,700 and not have the child pay a dime of tax on the earnings for federal purposes.  The other good thing about this is that these wages are deductible from the self-employment income of the farm and allowed as an income tax deduction.

For example, if the farmer has three children that perform enough services to make $5,700, the farmer will get a $17,100 farm deduction.  If they are subject to the maximum self-employment rate of 15.3% plus being in a 25% income tax bracket, then the savings are about 40% or $6,800.

Remember, the key items are:

1.  Child must be a minor child,

2.  Child must be compensated based upon a reasonable wage rate.  If the normal wage is about $10-$15 per hour, pay that rate.  Do not try to pay $25-$50 per hour.

3.  Make sure to issue a w-2.

4.  You can take the earnings for the child and contribute it to an IRA for the child.

5.  These wages are exempt from FICA, Medicare, and federal unemployment taxes.