Paying your dependent children to help out around the office is a good way to get them involved in your business. It's also a perfectly legal way to reduce your tax liability. A salary of between $1,000 and $2,500 per year is paid out as an expense, so it reduces your taxable profit. Your children will have no tax liability either, because as legal dependents, they have a $2,850 exemption. You can deposit the money in college funds, which will grow like IRAs, rather than paying them directly.
Of course, the kids will have to work, otherwise the IRS could disallow the salaries. They could clean the office, help with filing, wash vehicles, or send out mailings. Older kids can answer Saturday phone calls.
--Howard Scott is a business writer and small business tax preparer in Pembroke, Mass.
