The summer school break will start soon, and it could be to your advantage to hire your kids. It’s a win-win... They get life and work experience -- as well as a salary -- and you get tax and other financial benefits.
Among the benefits of putting your children to work for the summer -- or part time during the school
year -- are:
- Lowering taxes by redistributing business income;
- Teaching your kids how to handle and manage their money; and
- Working together toward paying the costs of higher education and avoiding heavy student debt loads.
The strategy that accomplishes all of this is income splitting – transferring assets from a high earner (you) to lower earners (the children). You not only shift income from your business tax return to theirs, your organization gets business deductions for the salaries they earn.
Added Sweetener: If your kids are using their salaries to pay for college or university, their tuition and other tax credits will help offset any taxable earnings. If they don't use all their credits, they can transfer them to you or their spouses. Or they can carry them forward indefinitely to use when they are working full time, earning more money and confronting larger tax bills.
Income splitting works with any business organization. It doesn't matter whether you operate as a sole proprietor, a corporation or a spousal partnership. All three business forms can pay wages to children.
However, there are some catches:
- The children must actually put in time doing legitimate work; and
- You must pay them a reasonable salary for their duties.
For more information, consult with your accountant. Income splitting can be complex and some techniques may be restricted by corporate attribution rules.