June 19, 2019
Summer is here and many businesses are rapidly ramping up for the heavier foot-traffic that comes with those busy summer months. If you’re a business owner looking for additional support, you may need to look no further than your family. There are tax breaks and other nontax benefits to hiring family, and as a bonus the kids can fill their resume, save for school and get better acquainted with managing their own money.
Real work only please
Businesses can get a business tax deduction for employee wage expenses when they hire their children or grandchildren. This deduction decreases your federal income tax bill, self-employment tax bill, and state income tax bill (where applicable). To qualify, the work performed by the child must be valid and their salary cannot be outlandish.
An example of this would be a sole proprietor who is in the 37% tax bracket hiring their 17 year old to help full-time throughout the summer. In this example the son earns $10,000, and has no earnings from any other sources.
The owner would save 37% of the total earnings ($3,700) in income taxes with no impact to his son. The son can then use the standard deduction for 2019 of $12,200 to completely shield his earnings from any tax liability. Everyone wins!
Impact on payroll taxes
A child working for a parent or grandparent would have wages that are exempt from Social Security, Medicare and FUTA taxes, if the business is not incorporated, nor is a partnership that includes non-parent partners. The child MUST be under 18 years old, and other conditions may apply. Contact your Faw Casson advisor to see if your business’s payroll taxes would be impacted.
Getting a jump on funding retirement
In some instances, the business may be set up so that the child receives retirement benefits. This would depend on the type of plan you have in place, and how the plan defines a qualifying employee. Any child that is collecting a paycheck from a legitimate employer can contribute the lesser of $6,000, or their earned income, to a traditional or Roth IRA.
There are certainly a lot of positives for hiring your children. They should be treated like any other employee: issued a W-2, records of their timesheets and job descriptions should be retained, and any paperwork related to their employment. If you have any questions, we’re here to help!