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Hire Your Kid & $ave


Cool tax tip: hire your kids to help avoid the 3.8% net investment tax on the sale of your business.

Here is a very important tip for business owners.Normally, sales of stock and other capital gains are subject to a relatively new 3.8% tax on net investment income (NII). This applies not only to stock sales but also to sales of any capital asset or if you sell your business. HOWEVER, if you work in your business or are an “active owner,” you can avoid the 3.8% Medicare Surcharge on net investment income when you sell your business. 

Example: John and Mary and their two children own a business. The kids are 20% owners each. John and Mary are active in running the business, but the kids are not active participants. If the stock of the business is sold for a net profit of $4,000,000, John and Mary avoid the 3.8% Medicare penalty on their share of the game since they were active participants in the business; however, their two kids will be hit with the 3.8% surcharge on NII on their share of the sale since they weren’t active participants. So what should you do under this situation?

Hire your kids in the business. If John and Mary’s kids are material participants in the business, they also will avoid the 3.8% Medicare surcharge on net investment income. They will have to do some legitimate work, but it is an easy and simple way to potentially save a lot of money.

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