Updated: Aug 1
Welcome to STA’s most recent blog with the goal to clear away the financial fog!
This week, we navigate the idea of hiring your children and what all this entails.
Isn’t it a wonderful idea to instill the value of responsibility, duty, and entrepreneurship into our children? Of course it is!
One of the best methods for achieving this goal is allowing your kids to get hands-on experience by getting directly involved with the family business. If you have been pondering the idea of hiring your child or if they have been showing signs of work readiness, then this article is for you. This is your chance to teach your children about working hard to earn money, solving realistic problems that arise in our world, and bonding through shared experiences with mom and/or dad.
The tax benefits of hiring your children is the cherry on top!
Determine Entity Types
What needs to first occur is a conversation between the business owners contemplating the the employment of a child for the business and if the entity type is eligible for this great deed.
The entity types eligible to receive tax benefits for hiring their children:
Single Member LLC’s treated (taxed as sole-props)
Partnerships (marriage, friendship)
LLC’s treated (taxed as partnerships)
Discuss Child's Ability
Next, all involved parties should discuss the willingness and ability for the child to carry out the pre-determined tasks needed to complete the job.
Ask yourself are these delegated tasks reasonable for their age and developmental level:
“Your child should be seven years old or older to be a valuable employee”
“Under Florida’s child labor laws, minors of any age (under age 13) may work directly for own parents or guardians, during hours not required to be in school”
“As long as not employed in any of the 17 hazardous occupations.”
Is The Task Part of the Day-to-Day Operations?
Next, determine if the task is a legitimate service that is part of the day-to-day operations. The work must be “ordinary and necessary” for business and they must be paid for services actually performed. No chores, babysitting, or mowing the lawn. (unless you’re in Lawn Care)
Keep an accurate record of their time worked, and pay a reasonable wage.
Pay them less than $1,000 a month (to stay under the Standard Deduction). 12 months.
You can hire a child under 18 years (as “legitimate employee”) and wages will be exempt from:
Social Security Tax
Federal Reemployment (FUTA) Tax - up to age 21
In 2018 the “Tax Cuts & Jobs Act” doubled Standard Deduction from $6,350 to $12k
The current standard deduction for single filers for 2021 is $12,550!
Imagine that untaxed, paid to your child.
Is provided to every single tax payer.
A child, 18-years-old or under, can get paid up to the standard deduction amount without having to file a tax return or pay into Social Security or Medicare.
Also, if the child is working for an LLC, they do not have to pay payroll taxes or income taxes on this money. This is not the case for C-corporations and S-Corp businesses because you must pay the payroll tax based on how much the child gets paid - although you are still avoiding self-employment taxes. Darn!
Avoid Payroll Tax
There are possible ways to avoid this payroll tax through legal forms of business structures, but you will need to consult with a professional for the specifics of your business needs.
Hiring and paying your child enables you to avoid “Kiddie Tax” on unearned income.
“The first $1,100 of unearned income qualifies for the standard deduction. The next $1,100 is taxed at the child’s income tax rate. A child (or young adult’s) unearned income beyond $2,200 is taxed at the parent’s normal tax bracket.
"Can I pay them as an Independent Contractor?"
If your child works regularly, they probably don't qualify as independent contractors (1099).
They will have to pay self-employment tax on the money paid to them as a 1099. If you're a sole proprietor or partnership LLC, this self-employment tax could be higher than Social Security or Medicare taxes.
Please do your due diligence with research before you activate your child as an employee.
You may trigger an Employment Audit if you ignore Employee vs. Contractor terms!
Other important tips:
Be sure to pay your child's wages out of your business bank account. The tax benefits only count if the money is paid directly from your business.
Once it is paid out, it belongs to your child and they can even use it for retirement accounts such as an IRA.