Quite often a spouse and children can be gainfully employed in a business. This can help reduce the overall tax due on the business profits and at the same time retaining the same income with less tax payable within the family.
There are both Income Tax and PRSI implications involved where family members are employed in the business, which we explain below first of all in respect of spouses and then children.
A spouse could be either employed in the business or made a partner in the business with you. This would give them an income, which of course is taxable. However since the introduction of individualisation a spouse can earn income up to €23,800 for 2011 and only pay tax thereon at the 20% tax rate. If you pay Tax /PRSI/USC at the top rates this will yield an annual tax saving of approximately €5,500 for the year.
The amount which you could pay a spouse for earlier tax years for maximum tax saving was as follows €25,000 for year 2007, €26,400 for year 2008 and, €27,400 for 2009 & 2010.
Generally speaking a persons spouse is nearly always involved in some shape or form in the running of a small business so there should be no difficulty in justifying a salary payment for income tax purposes. For PRSI purposes a person who is directly employed by their spouse is not considered to be in insurable employment so no Employers PRSI payments are due.
Taking your spouse in as a partner in a sole trader business has various tax implications as you are treated as starting a new business in partnership which requires new tax registrations etc etc and should not be done without taking professional advice. We can provide this advice which will be subject to an extra charge.
TAX SAVING TIP
A tax saving of 5,500 approximately per annum can be achieved by employing your spouse in the running of your business or by making them a partner in the business with you.
Some businesses lend themselves better than others to employing young children of the owner in carrying out genuine work for the business e.g. small supermarket stacking shelves, shops etc. In other cases it is not unusual to find that children are more technologically advanced than their parents and will often provide assistance to parents who work from home in dealing with computers, emails, typing etc.
Once a child performs a genuine task for the business and is paid a normal salary then that salary cost qualifies as a normal taxdeductible expense for the parents business. The child can then use this money as they see fit e.g. educational expenses, holidays, pocket money etc.
A child can earn up to €8,250 per annum free of tax for the year 2011. If they work full time in the business they can earn €16,500 taxfree. Assuming your child provides genuine assistance to you in running your business on a part time basis you could pay them €150 per week free of tax, which in turn could reduce your tax liability by €80 per week. However the PRSI/USC implications of employing your children need to be considered.
No PRSI charges are due if the child is under 16 years of age or if over 16 carries out the work at home where the business is carried on.
The childs salary will be liable for the USC charge but at the lower rates.
TAX SAVING TIP
A child may be employed part time in the business and could earn up to €150 tax free. If you pay Tax/PRSI/USC at the top rates it will save you €80 per week.