Taxpayers with working age children that own their own business can use "income splitting" to reduce their tax liability. Income splitting is done by paying a child a wage large enough to cover what would normally be a family expense.

There are several advantages to this strategy. After-tax profit dollars of the family business, which would normally go to the parents' income, are transferred to a deductible wage expense. Children's wages are either tax free or at a much lower tax rate than their parents, and dependent children (under 18) working for their family business are exempt from social security tax and federal unemployment tax.

IMPORTANT NOTE: Children must be suited for their position, a five-year-old can not be listed as an accountant, and accurate records must be kept of their employment.

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