Put Your Child on the Payroll This Summer, are you it self-employed business owner and the parent of a teenager? Giving your child a job this summer could be a smart tax move.
Deduction for you. The net income you earn as a self-employed person ill 2011 will he taxed at rates as high as 350,4) (federal), and any state income taxes imposed on your earnings will be an additional burden. By deducting wages paid to your child, you can reduce your self-employment earnings and your income taxes. The deduction is allowed as long as your child does legitimate work and the wages you pay for the work are reasonable.
Income for your child. The first $5,800 of your child\’s earnings will not, he taxable because the amount can be offset by your child\’s standard deduction. Any earnings over $5,800 will be taxed at your child\’s rate, hut that will probably he much lower than your marginal rate, hi 2011. up In $8500 of a single person\’s I:ixatcle income is taxed in the lowest 10% bracket.
More tax savings possible. The wages you pay your child are also deductible in computing your net earnings subject to self-employment tax. I Intil your child turns 18, those wages will he exempt from FICA taxes, assuming your business is unincorporated. So all around, You\’ll eonn\’ out ahead. •
Roth IRAs Versus Designated Roth Accounts
Survey says: 33.6% of 401(k) plans offered designated Roth accounts in 2009. While designated Roth accounts share certain similarities with Roth IRAs, they also have their differences. Here\’s a comparison that can help you determine which, if any, type of Roth account may he right for you.
Cot trihut ions to either type of Roth account are made after tax, and any earnings oil your contributions are untaxed while held in the account. Both contributions and earnings can be withdrawn tax free provided you\’ve held the account for at least five tax years mid the withdrawals are made on account, of your disability, oil or after the date you reach age 591A,, or because of your death.
You can contribute to a designated Roth account offered by your employer\’s 401(k), 40:1(1)), or 457 governmental Plan regardless of your income. To colttribute to a Roth IRA in 2011 , voc mx moilihed toljusted gross hwwiie can\’t exceed $122,000 (single). $179,000 (married filing jointly), or $10,000 (married filing separately)
You also can contribute more per year to a designated Roth account. In 2011, the maximum amount that can be contributed to a plan with a designated Roth account is $16,500; $22,000 if you\’re age 50 or older. (Your plan may impose lower limits.) The limits apply to all plan contributions, pretax and after tax combined. The mnaximunis for a Roth IRA are $5,000 and $6,000 (age 50 or older).
As is the case with most other employer-sponsored plan accounts, you generally must begin taking annual required minimum distributions (RMDs) from your designated Roth account once you reach age 70½. RMDs are calculated using IRS tables based on life expectancy. Lifetime RMDs aren\’t mandatory with a Roth IRA,U