Hiring Your Children to Work in Your Business Can Be the Best Tax Move
Once your children are old enough to work in a family business, the tax benefit can be quite significant. In light of tax law changes in 2008, the best strategy is getting earned income to children.
Young Children
Suppose you hire your child at age 14 to help with some basic needs at your business, such as filing or copying, and pay that child a reasonable hourly rate for the services rendered. That child will pay no federal income taxes on this earned income as opposed to you, the parent, who would pay tax on this income at a high rate. Further, if you organized your business as a sole proprietorship or a single member LLC, you do not have to withhold or pay Social Security taxes until the child turns 18. Even if your business is structured differently and you have to pay Social Security taxes, this strategy will still save you income taxes in excess of the cost of the Social Security taxes.
High School Kids
As your child gets older, he or she can work summers and after school and make a higher hourly rate. In 2008, if you can justify their salary as reasonable, you can pay the child up to $5,450 and the child still pays no federal income taxes. In fact, it can get even better, because the earned income permits the child to contribute up to $5,000 to a traditional deductible IRA. Therefore, the child could receive up to $10,450 in compensation and still pay no federal income tax.
Roth IRAs: The Best Choice for Children of All Ages
The idea behind a Roth IRA account is that the contribution you make to such an account is with after-tax dollars but the income earned over the years will generally grow tax-free. The earlier you fund a Roth IRA, the bigger the tax savings. The key to making Roth IRAs is that you must have earned income. So, hiring children early and establishing a Roth for them allows that income to grow tax-free generally for the rest of their lives. In 2008, if a child has earned income up to $5,000, they can contribute all of it into a Roth account. Further, any contribution, but not the income, can be withdrawn at any time without tax implications. So, if the child needs the money for college or later in life for a house, those contributions can be withdrawn tax-free. Parents can set up a custodial Roth IRA and control these investments until the child reaches the age of majority.
College-Age Children: Maximize Your College Tax Credits
If you, the parent, are in a high tax bracket, you generally do not qualify for a $2,000 lifetime learning credit for your college-age child. Under a loophole in this tax law, if you waive the dependent’s deduction for this child, the child can qualify for their own $2,000 credit. What this means is that a child can earn up to $21,458 in 2008. The child will owe $2,000 in taxes but can use the $2,000 credit. In other words, the child pays no taxes on this income.
Conclusion: Before you implement any of these strategies, there are other significant issues to consider beyond the scope of this alert. Please call us to discuss your particular situation and how you can best benefit under the tax law.


New Year’s Cleaning Rules for Your Business Records

All business owners would like to get rid of old records and free up space. However, before you fire up the heavy duty shredder, there are a few federal tax law rules you should know. Please be sure to read the whole article before you make a final determination of what to throw out.

Three-year paper records
Generally, for paper records listed below, you should hold these records for three years from the later of the date of filing a return or the due date of the return.
• Daily sales records
• Cancelled checks (for other business reasons, you might wish to hold longer)
• Bank deposit slips
• Auto mileage logs (but keep for the life of the vehicle, if longer)
• Paid vendor invoices
• Expense reports
• Entertainment expense records

Caution: Some state statutes exceed the federal statute by up to one year. So, if you want to be safe, consider at least a four-year holding period.

Permanent records
Unfortunately, there are records that you just should never get rid of, such as:
• Annual financial statements
• Tax returns and documents determining an income tax liability
• General ledgers and journals (including end-of-year final balances)
• Copy C of Form W-2
• Corporate stock records (including minute books and chartered bylaws)
• Real estate records

Special rules for corporate records
The IRS has special rules that require holding onto business records maintained on a computerized system. If your business has less than $10,000,000 in assets but you maintain items listed above on your computer, follow the paper record rules above. But if your business has more than $10,000,000 in assets, the IRS requires that your computer records be in a retrievable format. You must keep documentation for these data files, such as:
• System and program flowcharts
• Records formats
• Source program listings for programs used to create the files retained
• Label descriptions
• Detailed charts of accounts
• Evidence that the retained records reconcile to the taxpayers’ books and the tax return
• Evidence that periodic tests are performed on the retained records

Other things to consider
Please note that we are only considering IRS rules for record retention, and these recommendations are for the minimum period for retaining business records. In certain circumstances, such as potential litigation, you might consider a longer period. This tax alert should be considered only as a guide, and special circumstances can always apply. A good rule of thumb is that if you are not sure; seek a professional’s advice before you throw business records away.

Please contact us for further information. My Business Partner.us and 480-503-8904 or April@MyBusinessPartner.us

My Business Partner Merger

My Business Partner LLC is excited to announce the merger with Accounting 101 LLC! Nicole A. Rose brings her experience and skill along with her firm under our wing beginning October 15th, 2009. She comes to us with over 15 years in public and private accounting experience ranging from the hospitality industry to Real Estate and Construction. Raised in Pekin, Illinois she transplanted to Arizona in 2004 with her husband’s job transfer and has made this her home. She is a mother of two boys, Seth (6-1/2) and Noah (4-1/2), enjoys watching them grow and develop and in the small amount of spare time she has remaining is an avid reader. Her focus at the firm will be internal administration and Senior Accountant. You can welcome her at Nicole@MyBusinessPartner.us.