We tend to think of our business take home pay in terms of profit. In simplest terms, business profit is defined as: Net Profit = Income (from sales of goods or services) – Expenses
Business profit increases if you increase income while keeping expenses the same.
Business profit increases if you decrease expenses while keeping income the same.
Business profit decreases if you increase your expenses by hiring your children, but the take home pay for the family increases due to the taxes saved.
Hiring Your Children in the Family Business Example:
In 2010, Joe and Maria had $40,000 in income and $15,000 in expenses. As a result, they paid taxes on a $25,000 profit. For 2011, to increase their profit, they could focus on increasing income (sales of their goods or services), decreasing expenses, or both.
Suppose they wanted to increase their net profit by $5,000.
Year 2010$40,000 Income -$15,000 Expenses $25,000 Profit
Year 2011 $45,000 (Increased) -$15,000 $30,000 When Income Increase Profit Increases
Year 2011 $40,000 -$10,000 (Decreased) $30,000 When Expenses Decrease Profit Increases
Another option for Joe and Maria is Option #3, to increase expenses by hiring their children in the family business.
This decreases profit declared to the IRS and reduces their taxes.
Year 2010$40,000 Sales -$15,000 Expenses $25,000 Profit
Year 2011 $40,000 Sales -$20,000 (Increased Expenses) $20,000 Hiring Your Children Decreases Profit and reduces taxes
The family take home pay is still $25,000. They have $20,000 declared profit + $5,000 paid to their children. The main benefit of having children working for the family business is the family pays less in taxes. (Besides tax savings, another huge benefit of hiring your children is the ability to open a child Roth IRA.)
For this strategy to work for your family business, you need to:
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