Having Kids work for my LLC to fund IRA

[FIREandMONEY]

I am thinking of different ways of how to fund IRAs for my children.  The only way I know that they can fund one is if they receive taxable income.

I run a small clothing business on the side (LLC) and have thought about using my kids to help model some of the clothes.  Modeling rates in my area are $75-$150/hr. 

Could I have them work and pay them from my LLC's income?  What sort of tax breaks would this save me for that year (if any)?  Would I have to issue my kids 1099's?  If I pay my kids $6K a piece and they contribute it all to IRAs, is this ok?  Anybody else do this?  What benefits am I really getting?  Seems like it just sets up my kids for great chance of FI early in life.

Any discussion would be appreciated.

[walkwalkwalk]

If you are not paying W-2 wages, then you will have to pay 6,497 (1/(1-0.0765))*6000 to account for half the social security being deducted.  They would also have to pay self employment taxes ~14%. Are they really going to working 86.6 hours each for you? How many clothes do they have to model? I'm not personally questioning it, just giving you an idea of what you might have to document and back up against the IRS.

The good news for you is you get to deduct the $6,497 per child on your schedule C. However if you're a schedule C, then I would be wary about creating a loss on your taxes to do this for your children. So define small business. Are you netting enough per year so that this wouldn't create a loss?

[Frankies Girl]

Not taxable income - EARNED income. Taxable income is things like distributions from IRAs, pensions, etc... there is a difference.

Unless your kids are old enough to pass the sniff test - minimum age is 8 years old to do basic work in most types of business - then you'll likely get in trouble and most definitely have a "fun with audits" year.

Hiring your own kids - especially for a modeling gig - when they're really young/babies? Maaaaybe. But paying them 6K+ (don't forget employment taxes!) each - you REALLY think you could hire your own kids for modeling gigs and prove you spent that many hours worth with babies/toddlers to justify that income and it would also require your business to show that much minimum income as well. You can't have a business where you make 10K a year and pay your "models" 12K, especially when they're your own kids. Definitely red flag city.

And if you don't want to get into real trouble, you really should be issuing 1099s or whatever the proper tax forms are as well. And they'll need to file a tax return for that much income.

TL/DR: Talk to an actual accountant and/or do more actual research on the IRS site. You could potentially pay your kids a reasonable rate for real honest work like modeling and still start funding IRAs for them honestly but should absolutely not try to fake/inflate things that could get you into legal trouble.

[NOVAMustache]

I found this link helpful,

From my poking around on the same topic looks like you want to keep it reasonable, should be age appropriate, and they need to be treated as real employees and as such should have legitimatize positions and justifiable outcomes from those positions.

https://www.nolo.com/legal-encyclopedia/why-its-tax-smart-hire-your-children.html

[SeattleCPA]

Here's another resource that explains: Hiring Your Children as a Tax Loophole

Basically, a sole proprietor can pay minor children for real work... you don't pay payroll taxes and they pay income taxes if you do it right.

[FIREandMONEY]

If you are not paying W-2 wages, then you will have to pay 6,497 (1/(1-0.0765))*6000 to account for half the social security being deducted.  They would also have to pay self employment taxes ~14%. Are they really going to working 86.6 hours each for you? How many clothes do they have to model? I'm not personally questioning it, just giving you an idea of what you might have to document and back up against the IRS.

The good news for you is you get to deduct the $6,497 per child on your schedule C. However if you're a schedule C, then I would be wary about creating a loss on your taxes to do this for your children. So define small business. Are you netting enough per year so that this wouldn't create a loss?

The LLC brought in $24K Net in 2018, so if I paid out a few thousand to employees, it would be reasonable in my opinion. 

Not taxable income - EARNED income. Taxable income is things like distributions from IRAs, pensions, etc... there is a difference.

Unless your kids are old enough to pass the sniff test - minimum age is 8 years old to do basic work in most types of business - then you'll likely get in trouble and most definitely have a "fun with audits" year.

Hiring your own kids - especially for a modeling gig - when they're really young/babies? Maaaaybe. But paying them 6K+ (don't forget employment taxes!) each - you REALLY think you could hire your own kids for modeling gigs and prove you spent that many hours worth with babies/toddlers to justify that income and it would also require your business to show that much minimum income as well. You can't have a business where you make 10K a year and pay your "models" 12K, especially when they're your own kids. Definitely red flag city.

And if you don't want to get into real trouble, you really should be issuing 1099s or whatever the proper tax forms are as well. And they'll need to file a tax return for that much income.

TL/DR: Talk to an actual accountant and/or do more actual research on the IRS site. You could potentially pay your kids a reasonable rate for real honest work like modeling and still start funding IRAs for them honestly but should absolutely not try to fake/inflate things that could get you into legal trouble.

Yes, earned income, you're right.

I'm not trying to fake things at all.  I have over 700 individual pieces of clothing that I could potentially need modeled.  I would think to hire two infant models at $100/hour for 700 pieces would easily be in the $6K range each if I was to hire it out.  It would take many weekends of work.

I found this link helpful,

From my poking around on the same topic looks like you want to keep it reasonable, should be age appropriate, and they need to be treated as real employees and as such should have legitimatize positions and justifiable outcomes from those positions.

https://www.nolo.com/legal-encyclopedia/why-its-tax-smart-hire-your-children.html

Very useful, Thanks NOVA!

Here's another resource that explains: Hiring Your Children as a Tax Loophole

Basically, a sole proprietor can pay minor children for real work... you don't pay payroll taxes and they pay income taxes if you do it right.

Thanks SeattleCPA.  I will be talking with my CPA next month and getting his opinion as well.