Is your teenager looking for a job for the summer? Hiring him or her to work in your business not only provides a little income for your child, but it can result in several tax and financial benefits.
For starters, wages your child earns are tax-free up to the standard deduction amount of $6,350 in 2017. Furthermore, any excess is generally taxed at just 10 percent. In comparison, additional amounts you receive from your business as compensation are taxed at your top marginal tax rate — which could be as high as 39.6% — while dividends are generally taxable at 15 or 20 percent if you’re in the top tax bracket.
Under the “kiddie tax” rule, unearned income above $2,100 received in 2017 by a child under age 19, or a full-time student under age 24, is taxed at the parents’ top tax rate.
But wages aren’t treated as unearned income, so there are no kiddie tax concerns here.
If your child is under age 18 and works for your unincorporated business, the earnings are exempt from FICA tax. An exemption also applies to Federal unemployment tax up until the age of 21. This creates tax savings when the parent employing the child is self-employed or in a partnership.
Your child may also benefit from fringe benefits such as an employer-provided 401(k) or other qualified retirement plan. Similarly, he or she may contribute to an IRA on a deductible basis in combination with or instead of the company plan. Finally, the wages paid to your child are deductible by your business – just like they are for every other employee.
Of course, this arrangement might put a strain on family relations, so factor the personal aspects, as well the tax breaks, into the equation. Have questions? Give us a call. We are here to help!