EMPLOYING CHILDREN

Dear Client:

Sometimes business owners want to hire their children in their businesses.  The are many possible reasons for hiring your children, teaching your children the value of entrepreneurship, helping them develop good work ethics, etc.  But is it possible to get a tax break too?  In some cases, the answer might be yes.

CAN THE INCOME BE TAX FREE TO MY CHILD

In many cases yes:

1. Each of your children can be paid up to 13,850 (the amount increases each year).  As long as the wage doesn’t exceed that amount, the child will not owe any federal or state income tax nor have to file an income tax return.

2. Your business gets to deduct the $13,850, thus reducing your income tax.

3. As long as the children are under the age of 18 and your business is a sole proprietorship or single member LLC, you don’t have to pay FICA taxes on their wages.

4. If they are over the age of 18, you will have to pay FICA taxes on them.  However, the total tax rate for social security is 15.3%, so it is often still advantageous.

5. The children are required to perform actual services and receive wages that are reasonable for the services being rendered.

6. You have to have proof of the services rendered (i.e. time cards, etc.).

How about owners of S and C Corporations, can they still get this deduction?  The answer is, often yes:

1. You can pay your children from S Corps or C Corps, but at any age, you have to pay social security taxes for them.

2. As an alternative, you can setup a Family Management Business and contract with the S or C Corporation that is structured as a Schedule C, and then pay the children from the Schedule C.  If it is structured that way and they under the age of 18, they can receive the wages free from social security tax.

EMPLOYING CHILDREN

August 14, 2023

(Continued)

In some cases, if you are willing to make an IRA contribution for your children, you can increase the amounts paid to the children and still allow them to pay no taxes.

If you think that this strategy would be helpful in your business, please don’t hesitate to contact us at 505-232-3275.

Regards,

Larry Filener, CPA

Southwest Accounting Pros, LLC