Hire Your Child, Save Taxes

By Steve Barlotta, CPA

With summer upon us and school adjourned until September, now is the time to hire your child in your small business. If you’re running your company as a sole proprietorship or a husband-wife partnership, there are quite a few tax-savings benefits to employing your kid part-time or full-time, for that matter.

If your child is under age 18 their wages will be exempt from Social Security and Medicare taxes and federal unemployment tax (FUTA tax). However, when your child reaches the age of 18, Social Security and Medicare taxes need to be withheld on the wages. But, no FUTA tax is due until age 21. To qualify for this exemption your business needs to be operated as (1) a sole proprietorship, (2) a single-member LLC that’s taxed as a sole-proprietorship, (3) a husband-wife partnership, or (4) a husband-wife LLC that’s taxed as a partnership.

Also, keep in mind that in 2013 your child will be able to shelter up to $6,100 of wages from federal income tax through the standard deduction. So, by implementing this strategy there is a great likelihood that your kid will not owe any federal employment taxes and federal income taxes. That can be a decent chunk of change.

In terms of your business you’ll be able to write-off the payroll costs on your tax return. This deduction will in turn reduce your federal taxes, your self-employment taxes and your state income taxes, as well. Also, this deduction can help you negate some of the new tax increases that come in to play for 2013. This would be the .9% Medicare tax on earned income, the 3.8% Medicare surtax on unearned income and the phase-out of itemized deductions and dependent exemptions.

If your business is a corporation, the federal employment tax exemption is not available to your child. However, hiring your kid can still yield some tax benefits. Your child’s wages will be sheltered from taxes up to $6,100 for 2013, and your business can still deduct the wages and the employer’s share of employment taxes.

To keep above board with the IRS, your child’s wages must in line with the work that was performed. Also keep the same records you would maintain for any other employee so you’ll be able to substantiate the hours worked and the functions performed. Most importantly, your business has to issue your child a W-2 for their wages paid during the year just like any other employee.

As you can see, there are many benefits from hiring your child, particularly if they’re under the age of 18. In addition, your kid will gain valuable work experience and may even learn the importance of financial responsibility. Who knows, maybe some of that money earned can be used to help pay for college.

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