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Education Planning for Small Business Owners

When it comes to college planning, every dollar counts. 

With a bit of foresight and planning, you can find compelling ways to save money and get the most out of your investment. That’s especially true if you’re a small business owner with a teenager headed for higher education.  

In fact, there are three specific strategies business owners can use to reduce their total college cost by potentially thousands of dollars. 

Strategy 1: Exclude Your Business (And Its Assets) From FAFSA

Small business owners are the backbone of America. You’ve put countless hours of blood, sweat, and tears into building your business. 

Plus, you’ve survived seasons of uncertainty, fluctuating economies, and unexpected lockdowns. If anybody deserves a little bonus, it’s you. 

Thankfully, business owners get a little bit of help when applying for financial aid. Here’s how: when you fill out the FAFSA, you don’t have to report the value of your business. Furthermore, you also don’t need to report any assets owned by the business. 

This is known as the FAFSA “Small Business Exclusion” clause, which has been in effect since 2006. To qualify for this exclusion, you must meet the following two criteria:

  • Your business must be owned and controlled by the family (i.e. over 50% of the voting rights must be under family control).
  • Your small business must have less than 100 full-time employees.

Plus, if you own a farm (and consider it your primary place of residence), you are also able to exclude it (and its associated assets) from the FAFSA. 

As a result, your Expected Family Contribution (EFC) will not be affected by your small business, farm, or any associated assets. 

Strategy 2: Reduce Your Tax Burden By Employing Your Child 

Whether you have the opportunity to hire your child or have already done so, this strategy provides a powerful route to reducing your overall tax burden. 

While it will potentially save you thousands on college, it’s an essential practice for your financial freedom in general.

Here’s the key stipulation: your teenager must do legitimate work for your business and receive competitive wages on par with other non-family employees.

If you meet these conditions, both you and your child will reap two key benefits:

  • You will not have to pay FICA or Medicare taxes on their wages. 
  • Your child will likely have no federal or state income tax liabilities. 

For example, let’s say your small business earned $100,000 in taxable income in New Jersey (where such corporations are taxed 7.5%, in addition to the current federal rate of 21%).

Let’s say you identify $10,000 in potential work your teenager could accomplish over the course of a summer. If you were to complete that work, you would pay $2,850 in income tax ($10,000 times your tax rate of 28.5%). 

Conversely, if you hire your child to complete the work, they will pay exactly $0 in taxes.
Not bad, right?

That’s how employing your child decreases your tax burden. And if you rinse and repeat the process over the course of four years, that could become $11,400 in saved income that could help cover the cost of college. 

Even if your child doesn’t decide to pursue a bachelor’s degree, this is a great way for you to save money while giving your child a chance to work. 

Strategy 3: Save Money Through “Section 127 Plans”

Educational Assistance Programs (EAPs) are certainly a major investment for any business owner. If strategically used, however, they could help you and your family save real money on college. 

While larger companies often use “Section 127 Plans” to help their employees fund graduate studies, businesses can also use them for undergraduate degrees. 

As a result of the pandemic, Section 127 was recently extended through December 31, 2025.

Under this provision, employers can provide tax-free payments of up to $5,250 per year to eligible employees. They can also pay for any books, supplies or necessary equipmentthe student may need.

As the parent of a college-bound child, your small business must have a written educational assistance plan and satisfy these additional requirements to qualify:

  • Your child must be 21 years of older 
  • Your child must be a legitimate W-2 employee of your company
  • Your child must not be a dependent (i.e. he or she must cover at least half of their living expenses)

If your child meets these requirements, you have two options on how to proceed:

  • You can choose to pay $5,250 of tuition out-of-pocket. To continue with our earlier example of a 28.5% tax rate (New Jersey state + Federal), you would need to earn a gross income of $7,342 to pay the $5,250. 
  • You can pay the $5,250 as a business owner. This way, you will only need to earn $5,250 in income, as the payment therefore becomes a business expense. As a parent, you will therefore have saved $2,092. Though you can only use this provision when your child is 21 or older, you could potentially save up to $4,184 on the cost of college (assuming he or she is eligible for two years). 

Moving Forward

No matter which path you choose, be sure to capitalize on your role as a business owner to save money throughout your child’s college education. 

Though these are all uniquely powerful strategies, keep in mind that they’re only one component of your larger education blueprint. When working in concert with 529 Savings Plans and our state-of-the-art College Aid Pro™ software, these strategies will empower you to make the most of your college investment. 

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