Back to top

LBCPA News

Click here to go back

Hiring Your Minor Children For Summer Jobs

Posted by Admin Posted on Aug 02 2022

t

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:

  • Shift some of your high-taxed income into tax-free or low-taxed income, and
  • Realize payroll tax savings (depending on the child’s age and how your business is organized).

Plus, you can spend more time with your kids.

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 pay 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 income tax cost to your daughter. She can 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 your 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 and certain other conditions are met, your child’s wages are exempt from Social Security, Medicare and FUTA taxes. 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.

If you have any questions regarding accounting, domestic taxation, essential business accounting, international taxation, IRS representation, U.S. tax implications of Real Estate transactions or financial statements, please give us a call at 305-274-5811.

Source: Thomson Reuters   

The information provided on the LBCPA Blog is a community service for general information purposes only, and should not be used as a substitute for consultation with professional advisors who specialize in the topics covered. Please refer to your advisors for specific advice on these subjects. The information is not intended to be used, and it cannot be used, for the purposes of avoiding U.S. Federal and/or State tax laws or the tax laws of any foreign jurisdiction.

These blogs contain general information only and Lord Breakspeare Callaghan LLC or any of the other companies or firms presenting information are not providing accounting, business, financial, investment, legal, tax, or other professional advice or services. Lord Breakspeare Callaghan LLC or any of the other companies or firms contributing with articles shall not be responsible for any loss sustained by any person who relies on this information.