Vicky’s Virtual Office

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Your children make excellent workers to help with the family business! The question however is whether you have to report what you pay your children.

If the work they did for you relates in any way to your business then the answer is yes. Your children are thought of as common law employees and a W-2 needs to be filed for each child that you have paid to work for your business. Reporting what you pay your children to help with your business is very beneficial to you, as it will help to offset your business income and reduce your tax expense and we all want and need to do that.

The money your children have earned throughout the year, what about that? Do they have to file, as well? There are certain instances where they do. It is depends on the amount of money they earn and how they earn it.

According to Government Publication 929 of the Internal Revenue Service (IRS), each dependent child needs to file if he or she has an unearned income, such as investment gains, in excess of $850 or an earned income of over $5,150. An additional rule is that if your child’s gross income is greater than the larger of either $850 or his or her earned income (up to the $5,150), then he/she is also required to file. Your children make the best workers to help with the family business! The question however is whether you have to report what you pay your children to the IRS or not.

With the children are taken care of, let’s talk about mom and dad. Is it better for a husband and wife to file together or separately?

In most cases, it is more advantageous for a married couple to file jointly. When married couples decide to file separately, there are too many rules that apply. There were eleven last time I checked. And, Government Publication 501 of the Internal Revenue Service (IRS) even states directly within it that “because of these special rules, you will usually pay more tax on a separate return than if you used another filing status that you qualify for”, such as filing jointly. We certainly do not need to pay any more than need be.

A few examples of the disadvantages of filing separately are: being taxed at a higher rate; loss of several popular tax deductions or credits, i.e. child and dependent care expenses, earned income credit and education credits; and if your spouse itemizes his or her deductions, then you lose your ability to claim your standard deduction on your return.

So, as you can see, claiming separate when married not only carries with it a host of disadvantages, but can prove to be quite a complicated process, as well. It is important to understand all of these tax issues in order to have financial health for your family. Make sure to visit the IRS website or your own tax preparer for the latest tax laws!

creative commons photo by ang(3 Girls and a Boy)