Hire your child and give him a pension, too.

Hello June,

I am an Independent Literacy Consultant. I am a sole proprietor who set up a SEP [simplified employee pension] last year for myself.

Now I am taking advantage this summer of hiring my 17 year old to work in my business (I only have to pay withholding taxes on him, not Social Security, Medicare or unemployment, via a special regulation with the IRS (outlined in Publication 15).

However, I want to do what is more advantageous for our family in terms of contributing to an IRA for my son, either directly as a employer-paid contribution or by asking him to contribute from his salary to a traditional IRA. Is that the only or best way to do it? Do I have other options?

Cathy in Huntsville, AL


Dear Cathy,

The following factors come into play when choosing a pension type:
** Your tax bracket
** Son's tax bracket
** Amount your son will earn this year
** Your business net income
** Whether now or in the future you plan to have other employees
** Your age

There may be a plan for you and your son that is more advantageous than a SEP but without a lot more info there's no way to tell.

Whether your employee is your son or a non-relative you must treat him fairly. That means all employees must receive the same benefits and that you cannot give yourself a better benefit than you give your employees.

With your current plan you need to complete a Form 5305-SEP and keep it with your records.

All SEPs are also IRAs. So the best way to use your current SEP depends on your son's income. An IRA allows for a $4,000 contribution. A SEP allows you to contribute 25% of his wages. Your contribution to his pension is a business deduction for you. Choose the method that gives you the biggest deduction.

Best regards,
June