 |
Cathy A. Robinson, CPA
Senior Manager |
School is out for the summer. College and high school students
alike will be in search of jobs. So how does it work if you own your own
business and have a child looking for a summer job? Is it wise to hire them on?
If you hire them, how does that work for deductions? There are five tips that
can help to answer these questions.
1.)
Hiring your child can be an effective income-shifting
strategy for a taxpayer that owns his or her own business. In fact, there may be favorable payroll taxes
that apply to you and your business. Many business owners who are parents do
not understand is that should you hire your child, if they are under the age of
18, you are not required to withhold any payroll taxes. This stipulation, however, only applies to
Limited Liability Companies (LLC) and Sole Proprietorships.
It should also be noted that if you own an S-corporation
or a C- corporation, you also do not receive the benefit of avoiding payroll
taxes when employing your child.
Instead, you will have to pay your child out of a corporation and have
to withhold payroll taxes.
2.)
If preparing your child for the future is also
of concern, hiring your child can also help to ease your mind. With
earned income they can contribute to a ROTH IRA. This is a great opportunity
that would allow the earned income to be put into an account and later be
pulled out for college. You may be able
to pull the money for college expenses penalty and tax free.
3.)
You may have also heard of something called Kiddie
Tax. For many parents who are business owners, this tax may be something you find
yourself concerned with. However, earned income is not actually subject to Kiddie
Tax, regardless of age. This tax, in
fact, only applies to unearned money or the child’s investment income.
4.)
So what does this mean for you the parent? The first $6,300 of income made isn’t taxed
by the federal government. By hiring your child, you keep that money in the
family. Other deductions include claiming your child on your return as a
dependent and taking that exemption, as well as the Child Tax Credit.
5.)
The most important thing to remember is that you
need to keep your business legitimate even when hiring your child. Your child
should only be paid for the services that they render to your business or
property. Payments must also be made to your child and should be in accordance
with the services they are providing. It
should go without saying that by hiring your child they should be performing a
necessary task to the business so that they may be legitimately involved with
it. Hiring them to do chores around the house will not qualify you for
deductions, and could also involve setting yourself up to be audited.
In conclusion, hiring your child could be a good idea for
a parent who is a business owner. It can help you pay for college later on down
the road, give you a tax break and also teach your children the importance of
having a work ethic.
Consulting your accountant before making any financial
move is always important, as they can help to guide you as you take the steps
towards a better financial plan for you and your child. Be sure that you bring
up the above points as your business takes the steps towards hiring your child.
This
update is published periodically by HW&Co. as an information service to
our clients, business associates and friends. It is general information and
professional advice should be obtained before acting on any comments contained
in this document.
