Have a teenager looking for a job for the summer? Consider welcoming them to the family business while school is on break. Hiring him or her to work in your business not only provides a little income for your child, can teach responsibility and provide first-hand experience of the working world, but it can result in several tax and financial benefits.
For starters, wages your child earns are tax-free up to the standard deduction amount of $6,350 in 2017. Furthermore, any excess is generally taxed at just 10 percent. In comparison, additional amounts you receive from your business as compensation are taxed at your top marginal tax rate — which could be as high as 39.6% — while dividends are generally taxable at 15 or 20 percent if you’re in the top tax bracket. Associate Partner Rich Middleton, CPA adds that “You may also realize savings in self-employment taxes.”
Under the “kiddie tax” rule, unearned income above $2,100 received in 2017 by a child under age 19, or a full-time student under age 24, is taxed at the parents’ top tax rate. But wages aren’t treated as unearned income, so there are no kiddie tax concerns here.
“Examples of unearned income include interest, dividends, and capital gains,” advises Ren Cicalese III, CPA, MST. “Be aware that the standard deduction typically changes from year to year, meaning that the amount of wages a child can earn tax free will change each year as well.”
If your child is under age 18 and works for your unincorporated business, the earnings are exempt from FICA tax. An exemption also applies to Federal unemployment tax up until the age of 21. This creates tax savings when the parent employing the child is self-employed or in a partnership.
Chris Cicalese, CPA, MSTFP reminds parents that, if this is the child’s first job, they may need help filling out their W-4 Form correctly. “It is important for your child to complete an accurate W-4. If completed wrong, it could result in under withholding and a tax bill at the end of the year. Use our free W-4 Assistant tool to help you and your child complete the form.”
Your child may also benefit from fringe benefits such as an employer-provided 401(k) or other qualified retirement plan. Similarly, he or she may contribute to an IRA on a deductible basis in combination with or instead of the company plan.
A few extra paychecks earned in the summertime “is a great opportunity to fund a Roth IRA,” suggests Rich. Associate Partner Mike Engleman, CPA agrees, adding that “the child can contribute up to the lesser of earned income or $5,500. While there is no current deduction, qualified distributions are tax free when the child retires.”
Finally, the wages paid to your child are deductible by your business – just like they are for every other employee.
Per Associate Partner David Evans, CPA, “Keep in mind that the wages paid must be for a bonafide job and be in line with wages paid to other employees performing the same duties. The wages must be paid through the company’s normal payroll system. So if the company normally pays wages by check, then the child’s wages would have to be paid in the same manner. If the rules are complied with, the business could get a tax deduction of up to $6,350 without the child having to pay any federal tax.” Click here for more tips on adding children to your family business payroll.
Of course, this arrangement might put a strain on family relations, so factor the personal aspects, as well the tax breaks, into the equation. Alloy Silverstein’s CPAs and family business advisors can help walk you through all of the tax aspects if you’re considering hiring your child.
Contact us for guidance and application to your individual situation →
© MC 2017 | “Tax Tips” are published weekly to provide current tax information, tax-cutting suggestions, and tax reminders. The tax information contained in this site is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance.
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