Abstract: Business owners may be
able to hire their minor children this summer and get tax breaks and other
nontax benefits. While owners save on payroll taxes and lower some costs, the
kids also benefit. They can gain on-the-job experience, learn practical skills and
at the same time learn how to manage money. A sidebar notes that earned income
can help young workers get an early start on funding a retirement plan.
Hiring your minor children for summer jobs
If
you’re a business owner and you hire your children this summer, you can obtain
tax breaks and other nontax benefits. The kids can gain on-the-job experience,
save for college and learn how to manage money. And you may be able to:
Plus, your kids will spend time with
you.
A
legitimate job
If
you hire your child, you get a business tax deduction for employee wage
expenses. In turn, the deduction reduces your federal income tax bill, your
self-employment tax bill (if applicable) and your state income tax bill (if
applicable). However, for your business to deduct the wages as a business
expense, the work performed by the child must be legitimate and the child’s
salary must be reasonable.
Let’s
say you operate as a sole proprietor and you’re in the 37% tax bracket. You
hire your 16-year-old daughter to help with office work on a full-time basis
during the summer and part-time into the fall. Your daughter earns $10,000
during 2022 and doesn’t have any other earnings.
You
save $3,700 (37% of $10,000) in income taxes at no tax cost to your daughter.
She can then use her standard deduction of $12,950 for 2022 to completely
shelter her earnings.
Your
family’s taxes are cut even if your daughter’s earnings exceed her standard
deduction. Why? The unsheltered earnings will be taxed to the daughter beginning
at a rate of 10%, instead of being taxed at your higher rate.
How
payroll taxes might be saved
If
your business isn’t incorporated, your child’s wages are exempt from Social
Security, Medicare and FUTA taxes if certain conditions are met. Your child
must be under age 18 for this to apply (or under age 21 for the FUTA tax
exemption). Contact us for how this works.
Be
aware that there’s no FICA or FUTA exemption for employing a child if your
business is incorporated or a partnership that includes nonparent partners. And payments for the services of your child are subject to
income tax withholding, regardless of age, no matter what type of entity you
operate.
Keep
accurate records
Hiring
your child can be a tax-smart idea. Be sure to keep the same records as you
would for other employees to substantiate the hours worked and duties performed
(such as timesheets and job descriptions). Issue your child a Form W-2. Contact
us with questions about how these rules apply to your situation.
Sidebar:
Starting early makes a retirement garden grow
An
early start on saving for retirement can be a key to wealth building. A child who
has earned income from a job can contribute to a traditional IRA or Roth IRA
and begin funding a nest egg. For the 2022 tax year, a working child can
contribute the lesser of his or her earned income, or $6,000, to a traditional IRA
or a Roth IRA.
Depending
on the details of your firm’s retirement plan, your child may qualify to begin
earning retirement benefits that can grow for many decades. And the money may
be tapped penalty-free for certain eligible reasons, such as paying education
costs and putting down up to $10,000 on a first home.
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