January 22, 2012 § Leave a comment
How often do you hear…“Mom, I need some new jeans”…or “Can I have money to attend the Rascal Flats concert”…or worse yet, “I’m Bored”! Well if you are a small business owner, you can change all that with two simple words, “You’re Hired”.
Hiring your children (ages 7 to 17) to work in your small business may be a great tax savings strategy for you, and at the same time teach your children career skills, money management skills and responsibility – a win-win situation for all.
The first rule to remember when hiring your children is to make sure the work they are doing is necessary to the business. It must also be age-appropriate, and you must pay them reasonable compensation for their time and effort. In general, treat them like you would any other employee. This may mean your child receives a job description, punches a time clock or completes a time sheet, is issued a W-2 form, and perhaps even attends training sessions and staff meetings like other employees.
It is important to maintain excellent records documenting the work they have done and substantiating the amount paid should there ever be an audit. If these items are met, you may be eligible to receive tax benefits that will help decrease your tax liability and at the same time provide some financial resources for your child.
When you hire your child to work in your small business some of the tax and financial benefits you receive include:
- A tax deduction for you, the business owner. You get a tax deduction for the wages you pay your child which reduces your taxable income. For example, let’s say you and your husband are in the 28 percent tax bracket, and you hire your 16 year-old son, Michael, to work full-time during the summer and part-time throughout the school year. Michael’s total compensation for 2010 was $9,700, and he has no income from any other sources. You will save about $2,700 (28 percent of $9,700) in federal income taxes.
- Reduced self-employment tax. By using an LLC or any form of business entity other than a corporation, you will enjoy some Social Security tax savings by employing your child. The Federal Insurance Contribution Act (FICA) tax rules do not apply to services performed by a child under the age of 18 while employed by a parent.
- Income shifts within the family. You shift income from your higher tax bracket to your child’s lower tax bracket which saves taxes for the entire family.
- Building your child’s savings. Paying your child a wage allows them to open an IRA or a Roth IRA, which gives them a jump start on saving for college, a house or even their own retirement.
So… if you are tired of hearing your child complain they are bored or are short of cash, hire them and let the complaints end, and the productivity and tax benefits begin.
Kathi Koenig, CPA