Get Big Tax Breaks When Employing Your Kids
One of the tragic upshots of the Great Recession and the not-so-great recovery has been a big increase in teen unemployment. It’s not easy for kids to find jobs today, even when they’re looking for part time or summer employment.
Not only does this deny them income, it keeps them from learning some of the life lessons that are crucial for their success as adults.
However, if you own your business as a sole proprietorship or as a partnership with just the child’s other parent, you can give your kids jobs and enjoy some significant tax advantages at the same time.
Cut employment costs
Here are the main tax advantages for you: If your children are under 18 years old, you don’t have to pay social security or Medicare taxes. Additionally, when your children are under 21 years old you don’t have to pay the Federal Unemployment Tax Act (FUTA).
These tax benefits vanish if your company is a corporation, includes a non-parent partner, or is an estate. The IRS offers a lot of practical information on employing family members.
(By the way, if your kids are the entrepreneurs in the family, you can work for them and they can skip the FUTA payments. See? It pays off to teach your children the business basics.)
There are also tax benefits for your children. While they aren’t exempt from income tax, typically they can take the $6,100 standard deduction, so that’s $6,100 tax free. Further, considering the sad state of the Social Security Trust Fund, the savvy parent will have their children contributing to an IRA and that adds another $5,500 children can earn without having to pony up a share of the dough to Uncle Sam.
You can pay your children $11,600 virtually tax free. You’re going to be forking out funds for your kids anyway, it makes a lot of sense to insist that they earn it.
Know the requirements
Be certain that you are following the IRS rules. When you employ your children, they need to have job duties and descriptions that match their ages and abilities. If you think you can game the IRS on this, it could come back and bite you big time. Treat the employment of your children as you would any other hire.
In the same way, be certain that their compensation is reasonable for the duties they are performing at your business. If you pay your son or daughter to bus tables at your restaurant at a rate of $50 an hour, you’re going to end up in trouble.
Beyond the IRS rules, you’re teaching your children some very bad lessons if you compensate them beyond their true value at your workplace. You would be telling them that favoritism is okay as is cheating on their taxes.
In the long run, the work ethic and business principles they learn from you are much more valuable than the wages you pay them and the tax advantages you enjoy when you employ your kids.
Do it right.
Image: Efile, used under a Creative Commons license.