Article
The ability to hire your children and simultaneously receive a tax deduction is a benefit unique to business owners. The work experience gained, as well as the
wages earned, can be valuable to your child as well as provide potential tax benefits to you, the employer. Employment tax responsibilities are different for minor children (or children under 18.) Because the IRS is quick to challenge children’s employment, become familiar with the current tax rules and regulations.
Impact on parents
Any wages paid to your child are fully deductible as a business expense, which lowers your gross income. While payments for the services of a child are subject to income tax withholding (regardless of age), additional taxes owed may vary according to the type of business owned.
Social Security and Medicare taxes:
- Apply towards wages paid by a corporation (even if controlled by the parent, including S-corps), a partnership that includes non-parent partners, or an estate.
- Do not apply towards wages paid by a sole proprietor who is the parent, “spousal partnership’ in which each partner is a parent, or single member limited-liability company (LLC).
Federal unemployment taxes (FUTA)
- Apply towards wages paid by a corporation { even if controlled by the parent, including S-corps }, a partnership that includes non-parent partners, or an estate.
- Do not apply towards wages paid by a sole proprietor who is the parent, “spousal partnership’ in which each partner is a parent, or single member limited-liability company (LLC).
(state unemployment taxes may or may not apply)
Responsibility of parent
- Hire your child for a realistic job. Do not make up a position just for your child.
- Match job responsibilities to ability; Consider hiring younger children to sort and
distribute mail. Increase their responsibilities as your children age. - Keep accurate records of the hours worked. Use a time sheet, and add your
children to payroll.
Impact on children
Children under 16 can take advantage of the Standard Deduction by not paying income taxes on $6,300 of earned income. Your child will owe taxes on any earned wages in excess of the Standard deduction, albeit at a lower rate than you typically pay. Another tax advantage to children is the ability to contribute up to $5,SOO tax free to a Roth IRA.
Responsibility of children
- Deposit paychecks into an account before withdrawing funds, rather than cashing them, so there is a clear record of the child’s receiving the wages.
- File a tax return if he/she earns more than the Standard Deduction. Note: filing a tax return is the only way to receive a refund if federal or state taxes were withheld from his/her paycheck.
Remember to carefully consider how to best utilize your child’s abilities and talents corresponding to age, and keep meticulous records. It is always prudent to consult your with CPA before hiring your children to work in your family business.
