The following disclaimer is important, because reading the next paragraph could mean the difference between taking action that is very beneficial and making a huge mistake. Read this next paragraph multiple times!

If you are the only owner of a business, or an owner in a closely held business, this may be a way to save an additional tens-of-thousands of dollars for college for your kids compared to the way non-business owners (W2 employees) are able to. However, there are some rules to follow and details to pay attention to. I'll mention those below.

This mostly applies to business owners that have profitable income, and is most applicable to those in a high tax bracket. The strategy is an arbitrage to shift income from yourself (in a high tax bracket) to your kids (in a low, or zero tax bracket). If you don't have taxable income, this isn't mathematically helpful.

Here is information about the process.

● The overall objective is to pay your child out of the business, as payroll expense to the business which ideally would have a low tax impact to your child, then to put those funds directly to education. The alternative, if you don't do this, is that you would have more income in the business, which then gets taxed at a higher tax rate, plus you need to use your own personal after-tax income to fund the college savings for your child.

● Every American gets "the standard deduction" related to taxable income. At the time this narrative was written, the standard deduction is $12,000 per person. That means that the first $12,000 of income earned by each person is not taxed at the federal level - a 0% tax rate.

● If your business pays your child $12,000, the business expenses (a tax deduction) increase by $12,000 and the recipient pays no tax if that is the only income they earned during the year. Great plan, right?!?

In my business, I send the payment from the business to an account in the name and social security number of my child that I have control and authority over. Then, I send the funds from that account to the college savings fund for that child, rather than funding the account from my own after-tax income.

The result: I've funded $12,000 a year to my child's college fund while creating a tax deduction to the business.

Here are some further details to be mindful of:

● There are some types of businesses that can pay their children without either side incurring any FICA/Social Security/Medicare taxes, but most can't. The rules on this are pretty specific. I'm not going to go into detail on this here. You need to be working with a tax expert that understands the details in this area to take advantage of that situation with creating tax risk. For most businesses, the downside is you'll incur FICA tax (7.65% for the employee, plus 7.65% for the employer) in this transaction. So you aren't truly shifting income to a zero tax rate. As a reminder, the employer's share of FICA is tax-deductible, slightly lessening that blow.

● Your child has to actually work in the business. You aren't allowed to just call your child an employee for doing no work, and pay them $12,000. Below I'll mention the easiest way to do this.

How you fund the college savings may require some discussion with your tax expert. I understand it to be a gray area whether a child can fund their own college savings fund. Perhaps you would want to use a 401k or Roth. I've been advised that, at worst, I might have to take the position that the child is gifting their money back to me and then I'm still funding the college savings account. Just be aware that this is one of the gray areas, which you'll want to get some comfort around before proceeding.

The following is what I understand to be the easiest way to have your child work in the business, without having them actually work hundreds of hours. Also, I believe a child under the age of 7 is not actually allowed to provide any administrative work of any kind to a business, due to child labor laws.

Have you ever seen commercials on TVs that show a baby or child? Of course you have. They are models. They get paid for their work as a model in those situations.

I use my child like a model for promotional purposes for my business. They are on my company Christmas cards. They attend my company Christmas party. They take part in photo shoots that I use for business purposes. That is allowed for children of all ages, including brand new babies.

Exclusive to members of The Numbers Edge. I share the actual employment contract I use with my child. (I actually have three children - I use this with each of them). I prepare a new employment contract each year. As their legal guardian and because they are a minor, I sign each year's contract on behalf of them as the employee, and I sign it as the employer because I am the officer of the business.  It specifies the particular requirements as an employee to the business and how compensation works.