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Paying kids pays off

Agriculture.com Staff 07/06/2010 @ 5:02pm

The twin jobs of raising 11 kids and milking 370 cows give Ole and Jessica Johnson of Stanton, North Dakota, plenty of ways to help their children learn work habits that pay off for the family-owned operation.

Work deserves pay is the Johnsons' view. And from a young age, the children are paid for tasks as simple as feeding calves. By the time they're 15, the youngsters are earning the same hourly wage as the Johnsons' six adult employees.

"There's a huge tax benefit from hiring our own kids, and it helps out with cash flow," says Ole Johnson. "We're not just creating work for our kids. If we didn't pay them to work, we'd have to hire someone else to do it in their place."

Gary Hoff, University of Illinois Extension tax specialist, explains the tax savings. "If I, as a farmer or rancher, hire my child under age 18, I'm exempt from federal income tax withholding, Social Security, and Medicare for that child. The rule applies no matter how much I pay the child. But I do have to furnish the W-2 Form, regardless of the amount," he says.

The tax savings from hiring and paying your own child as opposed to an employee from outside the family applies only to sole proprietorships and husband-wife partnerships. The savings does not apply to corporations and partnerships between unrelated individuals or members of an extended family. "The reason is that the child is not the child of all the partners," says Hoff.

Of course, the amount you pay your child for labor can be deducted as a business expense, as long as the work performed relates to the farm or ranch business. This includes the upkeep of buildings or lots used in the business.

A dependent child is not required to file a tax return as long as earned income stays below a set amount. "For 2008, a child who can be claimed as a dependent on someone else's return can have earned income amounting to the standard deduction of $5,450, plus $300," says Hoff. "So, if I pay my child $5,750 and that's all the income the child earns, there's no federal income tax, Social Security, or Medicare tax due.

"If the child earns more than $5,750 in 2008, he or she will owe federal income tax," Hoff continues. "However, the child is still exempt from federal income tax, Social Security, and Medicare tax withholding on the wages paid by the parent. To avoid estimated taxes, they may request the parent to withhold federal income tax."

The twin jobs of raising 11 kids and milking 370 cows give Ole and Jessica Johnson of Stanton, North Dakota, plenty of ways to help their children learn work habits that pay off for the family-owned operation.

When paying your own children, the savings in cash flows to both you and your child. Here's why.

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