How These Tax Tips Helped Me One business owner's tax strategy is paying off.

Not long ago I received a text from my 16-year-old son—who works part-time at my company—that read, "Mom, can I open a Roth IRA?" I was thrilled that he was beginning to appreciate the significance that compounding interest and time would have on his retirement.

What I didn't realize was that I, too, stood to gain from my son's investments. This I learned from Kimberly C. Ford, managing partner with the accounting firm Hill & Ford in San Antonio, Texas, who specializes in tax strategies for small businesses. She says few entrepreneurs realize that the IRS allows an employed child to make annual Roth contributions of up to $5,500. Moreover, this account can be used to pay for the child's higher education (with some restrictions).

By hiring my son, I increase my payroll expense, lower my company's taxable earnings and free up disposable income (that I would have otherwise spent on his 529 college savings plan). Even better, this savings gives me the potential to put more toward my retirement and create an additional tax deduction of $5,500, since I use a traditional IRA.

Ford says there are other ways I can take advantage of the current tax code in addition to putting my child on the payroll. For example, by incorporating as an S Corporation I can pay myself through distributions and salaries. Unlike salaries, distributions are not subject to the 15.3 percent self-employment tax. And, as long as the owner is active in the business, these earnings are also exempt from the 3.8 percent Net Investment Income Tax.

However, Ford warns, "Don't get too greedy when allocating between salary and distributions. The IRS wants to see "reasonable' taxable compensation paid to an S Corp owner."

Like many entrepreneurs, when I formed my business I had zero income and a lot of expenses—meaning that strategically allocating taxable income wasn't a concern. Forming a limited liability company (LLC) was the logical choice, considering its low setup cost and minimal annual reporting requirements. I also knew that as my business grew and its profitability increased, I would need the flexibility an LLC provides.

While an LLC is taxed as a sole proprietorship or partnership (depending on the number of members), it gives its owner(s) the option to convert the business to a corporation as earnings increase or other factors change—an option that a limited partnership doesn't provide. Therefore, I can easily convert my LLC to an S Corp and avoid self-employment taxation on pass-through income. I like that kind of flexibility.

But back to that IRA. After running Ford's advice by my CPA, I was elated to learn the positive effect my son's retirement account would have on my own net income. We opened an IRA, and I even gave him a raise—under the condition that he contributes at least 50 percent of his take-home pay to the account. He took the deal.

Related Book: The Tax & Legal Playbook: Game-Changing Strategies For Your Small-Business Questions