The Tax Club Report

Unincorporated businesses like sole proprietorships, partnerships and LLCs could provide some valuable tax benefits when the business owner employs his own children under the age of 18. The wages are not subject to Social Security and Medicare withholding and if the child is under 21, the wages are also not subject to federal unemployment insurance. Thus, the wages that you pay to your children for services rendered are deductible by the business and payroll tax-free.

Self-employed taxpayers who employ their children can also avoid getting hit with the “Kiddie Tax”. When a child’s unearned income equals or exceeds the threshold of $1,900, the parent’s tax rate is used in calculating the income tax. This is called “kiddie tax” and it effectively curtails the ability of the parents to lower their family’s tax bill by transferring investment assets to their minor children who belong to a lower tax bracket. In contrast, earned income is not subject to this rule and when the taxpayer employs and pays his child, he is able to effectively shift his income to a lower tax bracket.

Hiring your spouse as an employee for the business can also create important tax deductions for self-employment tax purposes. The general rule is, self-employed taxpayers can deduct health insurance premiums for income tax purposes but not for self-employment tax purposes. The premiums are deducted as an adjustment to income on the first page of Form 1040 which reduces your total income. By hiring your spouse, a medical reimbursement plan can be established to be able to deduct 100% of one’s medical expenses. This plan will make health insurance premiums and other medical expense reimbursements a tax-free fringe benefit for the employee/spouse and 100% deductible for self employment tax purposes. Keep in mind that the employee/spouse should be paid to be covered under the medical reimbursement plan.

The requirements that the employee/spouse should meet to be eligible for the medical reimbursement plan are the following:

• The employee/spouse must perform legitimate services for the business.
• The medical reimbursement plan must be set up and the employee/spouse must conform to the plan rules.
• The insurance coverage must be in the name of the employee/spouse.
• The employee/spouse cannot be an owner of the business.

A health savings account can also be used in conjunction with a medical reimbursement plan to cover certain preventive care and specialty health out of pocket costs. We here at the Tax Club are committed to assisting you with any or all of your tax issues. Please contact us for a free tax consultation at (866)840-1829.

Tags: Employee Taxes, Income Taxes, Medical Reimbursement Plan

This entry was posted on Thursday, February 11th, 2010 at 4:02 pm and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.