Taxpayers can save family income and payroll taxes by putting a taxpayer’s child on the payroll of an owner where the mother or father is the owner (or owners of a partnership), and even make retirement plan contributions for a taxpayer’s child.

Here the key considerations:

Turning high-taxed income into tax-free or low-taxed income. Parents can turn some of their high-taxed income into tax-free or low-taxed income by shifting some of their business earnings to their child as wages for services performed by him. In order for a business to deduct the wages as a business expense, the work done by the child must be legitimate and the child’s salary must be reasonable.

For example, suppose a taxpayer is in the 28% tax bracket and 10% for state, and hires their child to help with office work. He earns $6,100 during the year (and doesn’t have any other earnings).

The taxpayer will save $2,318 (38% of $6,100) in income taxes at no tax cost to the taxpayer’s child, who can use his $6,350 standard deduction (for 2017) to completely shelter his earnings. Taxpayer could save an additional $2,090 in taxes if they could keep taxpayer’s child on the payroll longer and pay him an additional $5,500. He could shelter the additional income from tax by making a tax-deductible contribution to his own IRA.

Taxes are cut even if taxpayer’s child’s earnings exceed his standard deduction and IRA deduction, because the unsheltered earnings will be taxed to taxpayer’s child’s beginning at a rate of 10%, instead of being taxed at the parent’s higher rate.

Keep in mind that bracket-shifting works even if taxpayer’s child is subject to the kiddie tax, which causes his investment income in excess of $2,100 for 2017 to be taxed at the parent’s marginal rate. The kiddie tax has no impact on the child’s wages and other earned income.

What about income tax withholding? The parent’s business probably will have to withhold federal income taxes on their child’s wages. Usually, an employee can claim exempt status if he or she had no federal income tax liability for last year, and expects to have none for this year. However, exemption from withholding can’t be claimed if (1) the employee’s income exceeds $1,050 for 2017, and includes more than $350 of unearned income (such as dividends) for 2017, and (2) the employee can be claimed as a dependent on someone else’s return. Keep in mind that taxpayer’s child probably will get a refund for part or all of the withheld tax when he or she files a return for the year.

Social security tax savings, too. Taxpayer can also save some self-employment (i.e., social security) tax dollars by shifting some of their earnings to a child. That’s because services performed by a child under the age of 18 while employed by a parent isn’t considered employment for FICA tax purposes. That could be a 15.3% savings!

Retirement benefits. Business owners also may be able to provide their child’s retirement benefits, depending on the type of plan it has and how it defines qualifying employees. For example, if it has a simplified employee pension (SEP), a contribution can be made for the child up to 25% of his or her earnings but the contribution cannot exceed $53,000 for 2016. A taxpayer’s child’s participation in the SEP won’t prevent him from making tax-deductible IRA contributions.

It is important to properly document A taxpayer’s child’s responsibilities and amount of wages. Additionally, I recommend having some kind of system to document when he was working.

Many CPA’s reject that this can be implemented by an S-Corp. At Isler CPA, we implement another approach to get the full tax benefit of the child employment as described above, even as an S-Corp.

If you have any questions about how these rules apply to your particular situation, please don’t hesitate to call.