REI Tax Hacks: Pay the Kids
August 31, 2023
As a Real Estate Investor, you can save thousands of dollars in taxes by hiring your under-18 kids. It’s all upside: You help them develop a strong work ethic, give them experience in real estate, and best of all, jump-start generational wealth. Jay-Z paid his daughter Blue Ivy to cry on a track at 2 days old: It’s never too soon for a kid-friendly REI tax hack!
Here are 5 reasons to pay your kids about $13K each a year:
1, It’s a tax write off for you.
2, It’s simple – you don’t pay payroll tax or withholdings.
3, It can get you into a lower tax bracket.
4, Your kids pay no tax.
5, It’s a great way for them to start a lucrative Roth IRA.
Once you have a rental property or flip, you have a small business. The trick is to give your kids legitimate jobs in the business. The IRS likes something age appropriate and necessary: that could be assisting, cleaning, stuffing envelopes, paper shredding, web research, whatever. Pay each child up to $12,950 a year and you get a complete tax deduction, no withholdings, no W-2, no 1099. You’re just giving that money to your kids and getting a write-off.
If you’ve got four kids and pay each of them up to the limit, that’s over $50,000 every year that you don’t have to pay taxes on (and nor do they). And now with that chunk of change, you could open up a Roth IRA for them, which can be used to purchase investment properties—and the income the property generates is tax-sheltered within their IRA!
In short, you get a write-off to pay your kids, who pay no taxes, to fund a Roth IRA, to invest with you on your next deal. What you’re really doing is setting them up for the future and building generational wealth. How sweet is that!
There are a few things to remember with REI tax hacks:
-Create a paper trail. Have your child sign an employment contract. Keep note of the days they work.
-Make sure the pay is reasonable. You shouldn’t pay more than a typical hourly rate for the work. (That probably means starting by Labor Day if you want to get the full amount this year.)
-If you are a sole proprietorship, LLC, or husband-wife partnership, the simplest approach is to list the expense as “outside labor”. It’s not Payroll. You do not have to issue a W-2.
-However, if you plan to have your child contribute to a Roth IRA then you should issue them a W-2, so the IRS computer can match up his or her contribution to the IRA with their earned income. Even then, there are no withholdings like FICA and SUTA.
-If you have an S-Corp, there’s an additional step. You need to get a tax expert to set up an FMC, Family Management Company, which you would hire for the work, and the FMC would pay the kids.
-This hack only works with your own kids. However, if you want to do something similar for grandchildren or nieces and nephews who are under 18, you can pay and 1099 the parent of the child. The parent then pays their child and files a schedule C to write off the money.
-Most importantly, consult a tax professional and check up on all details at the IRS website. Remember, everyone’s situation is unique and only a tax professional can advise you on how IRS rules apply to your particular circumstances.
Come back for more REI tax hacks!
Disclaimer: This article is for informational purposes only and is not legal, financial or investment advice. To obtain advice tailored to your particular circumstances, you should consult a licensed professional advisor.