A “Project” To Pay For College Tax-Efficiently

February 9, 2022
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The tax code says, “The term ‘net earnings from self-employment’ means the gross income derived by an individual from any trade or business carried on by such individual . . .”

What is Considered a Business?

The Supreme Court ruled that to be in a trade or business, you need to be involved with continuity and regularity and that a sporadic activity does not qualify.

In Batok (T.C. Memo 1992-727), the court ruled that John Batok’s installation of windows did not rise to the level of a trade or business. Mr. Batok’s activity, although engaged in for profit, was neither continuous nor regular. He had never installed windows before this effort nor at any time after that.

The court ruled that Mr. Batok’s activity was a “one-time job” not subject to self-employment taxes.

Use This Method for Tax-Efficient College Savings

Basically, the tax code says you can hire your child to do a 1x project. You get to deduct the expense in your business and your kid doesn’t have to pay self-employment taxes. They would only pay the income tax, which would be pretty low. So you are saving taxes at 37% federally plus any state taxes and the kid pays less than 5% Federal Tax.

The one-time project can avoid having your child on the payroll, and it can give you the best of all worlds.

For example, say you are in the 40 percent federal bracket. You pay your 20-year-old college student $23,225 for work “projects.” You deduct the $23,225 and save $9,290 on your taxes.

Your child pays $1,028 in taxes.

If you would like to discuss this strategy in more depth and understand how it may work for you and your family, please contact Illumination Wealth today.

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