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Hiring Children: a Tax Savings With Kids Under 18 – Market Update 9/9/2022

The smoke is back. Sadly the Mosquito Fire is approaching 30,000 acres as of 11:30am and our air quality is back into the danger zone. Here is a link to up-to-date Mosquito Fire information including evacuations, road closures, help lines, shelters and weather. Let’s all pray that the cooler weather coming with provide some relief!

This week we’re diving into hiring your children or grandchildren, a tax savings that anyone with kids under 18 should be taking advantage of, even if you have to start a family business to do it.
Besides the tremendous tax savings, hiring your child or grandchild gives you the opportunity to work with someone you know, love, and trust all while helping the child to develop a strong work ethic, learn about entrepreneurship and the value of money. Kids can earn $12,950 per year tax-free and can help pay for their own expenses, save for college and start saving for retirement.
If you or someone you know is currently giving money to their child and plan to help pay for college, this is a strategy that is a win-win for everyone. By hiring your child you get a tax deduction for the wages, instead of giving money to your children from after tax dollars. Your child can earn up to $12,950 tax free and then only pays 10% on anything above that up to $10,275 and 12% up to $41,775. For example, you could pay your child $22,950 per year and your child would only pay $1,000 in taxes ($22,950 – $12,950 x 10%).

Important Rules to Follow

Rule 1: Your Child Must Be a Real Employee

They must be paid for services actually performed, helpful, and appropriate for the business such as answering phones, helping with your website, or cleaning. You get no business deductions when you pay your child for personal services, such as babysitting or mowing your lawn at home.
You must keep track of the work and hours your children perform. You can use an app or create a timesheet. It should list the services performed, date, and time spent. Although not legally required, it’s also a good idea to have your child sign an employment agreement specifying their job duties and hours.

Rule 2: Pay Must Be Reasonable

You can’t just pay any amount you choose. Your child’s pay must be reasonable. It’s obviously beneficial, tax-wise, to pay your kids as much as possible so you can maximize the amount of money they receive at a much lower tax bracket. You should have no problem as long as you pay no more than what you’d pay a stranger for the same work. Research what workers performing similar services in your area are being paid.
To prove how much you paid, use something trackable to pay your child like a check or direct deposit, once or twice a month as you would for any other employee. Your child should have a bank account that you control until your child turns 21, a Roth IRA, and a 529 college savings plan.

Rule 3: Comply With Legal Requirements for Employers

You are required to comply with most of the same legal requirements when you hire a child as you do when you hire anyone. You have to have an Employer Identification Number and your child must have a social security number. You must complete the federal and state payroll forms.
You don’t have to withhold any income taxes, payroll taxes, workers’ comp or state or federal unemployment insurance. If your business is an S or C corp, then to avoid FICA, it’s best to form a family management company as a sole proprietorship or LLC that your corp pays a management fee to, and that you pay your children out of.

5 Audit Proof Steps to Get You Started:

  1.  Fill out a W4 for your child.

  2.  Create a job description.

  3.  Create a timesheet with jobs performed, date and time.

  4.  Open a custodial bank account for your child.

  5.  Open a 529 college savings account and a Roth IRA.
This is a pretty simple way to take advantage of the tax deduction for yourself from money you are probably giving your child anyway! Below the 2022 standard deduction of $12,950, they don’t pay taxes on the income, they don’t file a tax return , and the money grows tax free in a 529 College Fund and Roth IRA. No brainer! Please contact me with any questions and if I don’t know the answer, I will put you in touch with a tax expert who does.
Here are the numbers from our local market this week:
We had 1 new condo and 1 new home come onto the market this week. We currently have 33 active condos ranging from $400,000 to $3,100,000; the median condo price is $845,000. We currently have 47 active homes on the East Shore ranging from $1,149,000 to $64,500,000 with the median price of $3,050,000 up another $150,001 from last week. Not much change in the market this week except median sales price which continuing to rise. Inventory, that was expected to increase, has stayed steady for several months.
Here’s a year-to-date local update:

Local East Shore Lake Tahoe, Nevada Stats – All Year-to-Date

Total Sales YTD:
Condos: 69 (↓13% YOY) | Homes: 64 (↓46% YOY)
The Median Sales Price:
Condos: $695,000 (↑1% YOY) | Homes: $1,507,500 (↑8% YOY)
Number of Sales Over $1 Million:
Condos: 16 = 23% (↑9% YOY) | Homes: 52 = 81% (↑2% YOY)
Highest Priced Sale:
Condos: $5,665,500 (↓6% YOY) | Homes: $32,000,000 (↑52% YOY)
Median Price Per Square Foot:
Condos: $595.66 (↑10% YOY) | Homes: $625 (↑4% YOY)
Median Days on the Market:
Condos: 69 (↑30% YOY) | Homes: 75 (↑12% YOY)
List to Sell Price:
Condos: 99% (↓7% YOY) | Homes: 94% (↓5% YOY)
Price Reductions this Week:
Condos: 1 | Homes: 1
If someone you care about needs guidance or recommendations, please share our contact information as we are honored to be able to help! If you would like to receive our in-depth market update or would like an evaluation of your property’s value we would love to hear from you! We’ve put together some information below that we think you’ll find useful. If you have anything you want to share with our community please let us know so that it can be included in future newsletters.
Thank you!

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