Hiring Your Minor Children for Summer Jobs

Business owners can hire their minor children this summer and get tax breaks and other nontax benefits. While owners save on payroll taxes and lower costs, the kids also benefit. They can gain on-the-job experience, learn practical skills, and have an opportunity to manage money. The earned income allows young workers an early start on funding a retirement plan or other long-term goals.

If you are a business owner and you hire your children this summer, you can obtain tax breaks and other nontax benefits. The kids can gain on-the-job experience, be exposed to the value of savings for long term goals and learn how to manage money. As explained below, you have an opportunity to:

• Shift your high-taxed income into tax-free or low-taxed income,
• Realize payroll tax savings (depending on the child’s age and your business organization), and
• You will spend extra time with your kids.

A legitimate job

If you hire your child, you get a business tax deduction for employee wage expenses. In turn, the deduction reduces your federal income tax bill, your self-employment tax bill (if applicable) and your state income tax bill (if applicable). However, for your business to deduct the wages as a business expense, the work performed by the child must be legitimate and the child’s salary must be reasonable.

Suppose you operate as a sole proprietor, and you are in the 37% tax bracket. You hire your 16-year-old daughter to help with office work on a full-time basis during the summer and part-time into the fall. Your daughter earns $10,000 during 2022 and does not have any other earnings.

You save $3,700 (37% of $10,000) in income taxes at no tax cost to your daughter. She can then use her standard deduction of $12,950 for 2022 to completely shelter her earnings.

Your family’s taxes are cut even if your daughter’s earnings exceed her standard deduction. Why? The unsheltered earnings will be taxed to the daughter beginning at a rate of 10%, instead of being taxed at your higher rate.

How payroll taxes might be saved [1]

If your business is not incorporated, your child’s wages are exempt from Social Security, Medicare and FUTA taxes if certain conditions are met. Your child must be under age 18 for this to apply (or under age 21 for the FUTA tax exemption

Be aware that there is no FICA or FUTA exemption for employing a child if your business is incorporated or a partnership that includes nonparent partners. And payments for the services of your child are subject to income tax withholding, regardless of age, no matter what type of entity you operate.

Keep accurate records

Hiring your child can be a tax-smart idea. Be sure to keep the same records as you would for other employees to substantiate the hours worked and duties performed (such as timesheets and job descriptions). Issue your child a Form W-2.

Teaching Financial Lessons:

With a salary, you child can open a bank account and learn the lessons regarding fees, watching your balances and budgeting. If they have a credit card or activity expenses, they can pay the balance from the account. Again, another lesson in money management.

An early start on saving for retirement can be a key to wealth building. A child who has earned income from a job can contribute to a traditional IRA or Roth IRA and begin funding a nest egg. For the 2022 tax year, a working child can contribute the lesser of his or her earned income, or $6,000, to a traditional IRA or a Roth IRA.

Depending on the details of your firm’s retirement plan, your child may qualify to begin earning retirement benefits that can grow for decades. And the money may be tapped penalty-free for certain eligible reasons, such as paying education costs or putting down up to $10,000 on a first home.

Managing the details:

Contact us with questions about how these rules apply to your situation.

[1] Family Help | Internal Revenue Service (irs.gov)

The HoganTaylor Tax Services

If you have any questions about the content of this publication, or if you would like more information about HoganTaylor's Tax services, please contact Tony Otto, Lead Tax Partner. You may also contact Denise Felber, Tax Partner.

INFORMATIONAL PURPOSE ONLY. This content is for informational purposes only. This content does not constitute professional advice and should not be relied upon by you or any third party, including to operate or promote your business, secure financing or capital in any form, obtain any regulatory or governmental approvals, or otherwise be used in connection with procuring services or other benefits from any entity. Before making any decision or taking any action, you should consult with professional advisors.