Summer is here and school is out! Woo-hoo, free labor—your kids working for you, what could be better? Well, possibly hiring your children in your business would be an even better answer.
If you have a business and it is either a sole proprietorship or a partnership that you and your spouse own together, then you could have some real tax advantages from hiring your child, especially if that child is under the age of 18.
First advantage is that you move that income from your tax bracket to their tax bracket. And if they make under $12,000 which is the standard deduction for 2019, then all of the earned income is offset by that deduction so no federal income tax owed. Then if they are 18 or under, they do not have to pay any Social Security or Medicare taxes on that income, either. So, no federal income taxes or Social Security and Medicare taxes. Sounds pretty good, huh?
On the business side, you get to take a deduction for the wages you pay them so you reduce your income taxes as well as your self-employment taxes by the amount of the wages paid to them. It also reduces your adjusted gross income (AGI) which could save you from being subject to the additional .9% Medicare tax that is new this year or the 3.8% Medicare surtax on investments, not to mention the different phase outs that are based on AGI such as education credits, IRA deductions, medical expenses to mention a few.
Another idea is to have the child contribute to an IRA since they will have earned income. This could be a deductible IRA or they could start building a ROTH IRA. Or they could save money for college, but beware of this since it will count dollar for dollar against any additional college aid the child applies for.
One caveat is that the child must be an actual employee. If you are audited by the IRS, you will need to have time records to show when the child worked and also that what you paid your child was a reasonable salary for the duties the child was performing. I have clients that have their children performing various duties such as answering phones, lawn mowing, pulling weeds, packing boxes, cleaning the office, stuffing envelopes, or assisting with social media. As long as it is a duty that you need to have performed in your business, it is real work and you can pay your child a reasonable wage.
You also need to be sure to meet all the legal requirements such as giving your child a form W-2 at year end to show the wages paid and preparing payroll reports as required by an employer when they have employees.
Even if you are not a sole proprietor or family partnership, it could still be advantageous by moving income to the child’s lower tax bracket. With the low unemployment rate, it could also be good for you to get an employee to get some of that work done that you haven’t had time or employees to handle.
Please ask your CPA or tax advisor for help if you think this is a possible tax savings that you would like to take advantage of.
And another added benefit is that you can teach the child the value of money, how to spend, save, and give wisely, and how to be the best employee ever!!
A little more about us:
Located in West Des Moines, Iowa with a branch office in Winterset, Iowa, McGowen Hurst Clark Smith (MHCS) celebrates 70 years of extending excellent service to our clients, providing them with accounting, auditing, consulting and financial planning expertise.
Established in 1946, our staff has grown from 3 to 60 employees, making us large enough to provide our clients with a broad base of experience and resources, yet small enough to offer very personalized service—which we feel makes us stand apart from other CPA firms. In addition to the traditional services of Accounting, Tax Preparation, Audit and Business Consulting, MHC&S offers our clients specialized services including Estate Planning, Business Valuations, Cost Segregation Studies, Retirement Planning, QuickBooks Training, Financial Advisory Services, Fraud Detection and Deterrence, Business Succession Planning, Litigation Support and more.
MHCS is a member of CPAmerica International, Inc., a national association of accounting firms offering membership to only 90 firms throughout the United States. This association offers a wide pool of additional technical expertise to the members firms, as well as continuing professional education necessary to maintain the degree of excellence which MHCS feels is vital in today’s business environment.