Summer is upon us, and with the sunshine comes the need for seasonal help for businesses of all kinds. One of many reason of hiring your children is tax benefits that come with it.
As the IRS acknowledges, hiring your children is a great choice. Putting them on the payroll earns them some valuable working experience, helps support the family business, and allows you to cash in on some serious tax savings. Let’s demystify the tax benefits of hiring your child seasonally by exploring the who, what, when, where, and why(s) behind it.
Parents who employ their children for seasonal work — be it full-time, part-time, or any old time the help is needed. Specifically, business owners with a sole proprietorship, a spousal partnership, or an LLC treated like either of those for tax purposes. It’s important to note that the IRS has different rules for corporations, who must pay payroll taxes on income paid to children.
Special tax benefits! If your child is 18 or under, you can hire them as a legitimate employee and pay them up to $12,000 a year — tax-free. Your child will only pay tax on any salary you pay him or her that exceeds the standard deduction amount for the year, or comes from other sources.
This is thanks to The Tax Cuts and Jobs Act (TCJA) which outlines the standard deduction that can be sheltered, which was $6,350 up until 2018 — meaning the savings have recently doubled under the standing law. If they your children stay under the earning limit, they usually don’t even have to file a tax return. And you get to deduct their wages, which lowers your business’ taxable income.
There’s another benefit for parents who employ their children that might not be as exciting as the notion of having their own earnings in-hand, but can be of tremendous value nonetheless. A working child can contribute their entire earned income, up to $5,500 to a Roth IRA or traditional deductible IRA. Roth contributions from a young age can yield significant savings by retirement age.
Once you’re set on hiring your children, just make sure the job you offer your child is age-appropriate — and that it actually benefits your business. If it’s a business need you’d otherwise hire an employee for, and work that actually needs doing, then you’re good to go! Just keep in mind when seasonal hiring: The wages must match the work. You can’t hire your young ones at exorbitant rates just to maximize your tax benefits.
When employing family members who are under 21. And when you want to leverage your child’s tax bracket instead of your business’, and you deduct their salaries from your business income as a business expense. Children 18 and under are exempt from paying Social Security tax, Medicare tax, and Federal unemployment (FUTA) tax. Children ages 18-21 must pay into Social Security and Medicare, but remain exempt from FUTA tax until they turn 21.
Your family-owned business, in need of seasonal help and hiring seasonal employees (or otherwise).
You already know by now that the “why” is for the tax benefits mentioned. Happy hiring!
Do you have unique issues or concerns not discussed in this blog? Then please contact us by email or phone. We are here to help.