Hiring your kids can be very beneficial for many reasons, not the least of which includes tax benefits. So consider putting your kid to work (so long as you follow all child labor laws!) and reap these potential benefits:
- Wages that you pay to your child are deductible by your business provided that your child is actually doing work for your business and you are paying them for the work at reasonable compensation levels.
- If you have a sole proprietorship or partnership where each partner is a parent of the child, wages paid to a child under the age of 18 are exempt from social security and Medicare taxes.
- Under these same rules, wages paid to a child under the age of 21 are also are exempt from Federal Unemployment taxes.
- Earned income is not subject to the kiddie tax, regardless of age.
- Income can effectively be shifted to your kids at a potentially lower tax bracket and sheltered by the child’s standard deduction.
- Earned income allows your child to get a head start on contributing to a retirement plan (i.e. traditional or Roth IRA).
- If your kid is also in college, the taxable income may allow them to file their own tax return and claim education credits that would otherwise go unused if your income is too high.
Here’s a nice little example of how the above points can benefit your family:
Say you have a sole proprietorship catering business. You hire your 17-year-old son or daughter to help you with the business and pay wages to him/her in the amount of $16,000. You get a deduction for the wages on your business which ultimately reduces your personal income tax by $5,600 at the 35% rate ($16k * 35%). You were also not required to pay social security, Medicare or FUTA taxes on any of those wages which saved you additional money. Your kid doesn’t have any other significant sources of income and they opt to contribute $10,000 to a retirement plan, thereby reducing their taxable income. The remaining $6,000 of income is reduced by their standard deduction, thus making taxable income equal to zero. It’s a win-win situation for the whole family!
By Kristen Janik, CPA