As a self-employed business owner, you may occasionally be taking help from your children in your business. On many occasions, it may be part-time work. There are many tax benefits of employing your children in the business. Below is a quick summary :
From a business perspective :
The wages that are paid to your children are a business expense. Therefore, this will reduce your income tax and the self-employed tax bill of the parents. Also, it is a tax-advantageous and legal way to transfer funds to the child. There are also no employer share of these taxes to pay and no withholding for the employee’s share of these taxes.
From the child’s tax filing perspective :
For the year 2018, up to $12,000 can be sheltered by the child’s standard deduction. Also, an additional amount of $5,500 can be sheltered by contributing to a deductible Individual retirement account. The child’s wages are also exempt from social security and Medicare taxes.
Overall tax impact :
The employer saves social security and Medicare taxes. The owner also benefits from a self-employed tax deduction.
The child is able to shelter most of their wage income from federal taxes.
Example :
John Doe operates a successful practice as a marketing consultant. His children Jack Doe and Jill Doe each assist him with his business and he paid them $5,000 each as part of internship this past summer. Jack and Jill Doe both do not pay any social security, Medicare or FUTA wages on the wages.
John Doe’s marginal federal income tax rate is 35% and his marginal tax rate is 3.8%. Therefore, he can reduce his federal tax liability by $3,500 on the $10,000. In addition, his self-employed tax bill is reduced by $380.
Few items to note here :
- The children should be paid reasonable wages and according to the law in relation to the work performed in the business.
- The wages should be according to the minimum wage requirement set by the government.