Owners of small businesses should consider hiring their children.
A young person who’s claimed as a dependent on their parents return can still have $12,000 of wages in 2019 and pay no income tax. The Standard Deduction offsets the wages.
The parents probably provided more than 50 percent of the basic support of the child (housing, food, clothing, medical and transportation expenses). The parents can still claim the exemption for the child, but dependent exemptions are no longer done (allowed). If the child is younger than age 17, the parents do get a Child Tax Credit of $2,000. That credit directly offsets income tax of the parents.
If the business is a sole owner business, a single member LLC or a partnership owned only by the child’s parents, there are no payroll taxes for the child or the employer to pay on the wages.
If the child has “unearned income” (interest, dividends, capital gains) of less than $2,200 in 2019, the “Kiddie tax” isn’t a problem, but the wages might need to be reduced a little.
If the business is a regular corporation that files form 1120 (also known as a C corporation) or is an S corporation that files form 1120S, then payroll taxes do apply. The payroll taxes (FICA, Medicare, etc) do apply, but there are still tax savings. The tax savings are just reduced by the payroll taxes.
The child (and the parents) should keep good records of the child’s work. When, doing what actions, what wages paid are important. It’s also best to pay the child what a stranger would be paid for the same time, work and availability. A common mistake is to pay the child less than fair market value. That “cheap” pay encourages the child to work for a fast food business where their friends work.
The child might be wise to save up to 50 percent of the wages and spend (enjoy) the rest of the wages. That may help teach the child about handling money, developing a savings habit and generally learning what it means to work.
If the child has enough wage income, then the child could do an IRA contribution of up to $5,500 for the year. The child could do a regular, traditional IRA or instead, a Roth IRA. If the child has only wages of less than $12,000, then a Roth IRA might be best. Helping the child invest the IRA money effectively gives another learning experience.
Hiring a child to work in your business can be good for all parties, except IRS.
Did you hear, “When you find a man who knows his job and is willing to take responsibility, keep out of his way and don’t bother him with unnecessary supervision. What you may think is co-operation is nothing but interference.” Thomas Dreier, writer and philanthropist.
John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs.