Summer jobs give children the opportunity to make some cash and can help them develop effective communication and teamwork skills, self-discipline and confidence. Hiring your child to work as an employee in your business offers tax benefits and changes in the tax law that have been made by the Tax Cuts and Jobs Act (TCJA) make it more beneficial than ever.
Tax Advantages of Employing Your Children for Summer Jobs
If you hire your child as a legitimate employee to work in your business, you can deduct his or her salary from your business income as a business expense. This deduction can lessen the amount of federal income tax, self-employment tax if applicable), and your state income tax owed.
If your child is under 18 (or under age 21 in the case of the FUTA tax exemption), his or her wages will be exempt from payroll taxes such as Social Security, Medicare, and FUTA. To take advantage of these exemptions, your business must operate as a sole-proprietorship, a single-member LLC taxed as a disregarded entity, or an LLC taxed as a partnership, and owned solely by husband and wife. Corporations must, however, pay payroll taxes on income earned by their children.
The TCJA allows your children to use their standard deduction to shield up to $12,000 in wages from federal income tax. For 2017, the standard deduction was $6,350, but under the TCJA it is almost double for 2018-2025. This means that your children who are employed by your business will owe $0 in federal taxes on the first $12,000 of their earnings in 2018, unless they have other sources of income. These rules allow you to move part of your business income from your tax bracket to your child’s tax bracket, which can lead to significant tax savings.
Following IRS Rules Is Vital
It is important to note that your child’s wages must be reasonable for the work performed. Make sure to keep proper documentation as required by law; including time sheets, job descriptions and complete W-2 and I-9 forms.
Benefits of Using a Roth IRA
Encouraging your children to make Roth IRA contributions is a valuable way to teach them the importance of tax planning, saving and investing in their future. To make annual Roth IRA contributions, your child’s earned income for the year must equal at least the amount contributed for that year. For the 2018 tax year, your children who work for you can contribute the lesser of:
- His or her earned income, or
Although the contribution limit is the same for both Roth IRAs and traditional IRAs, Roth IRA contributions make more sense for children and teenagers. Your child can withdraw annual Roth contributions for any reason without having to pay federal income tax or penalties. However, any Roth IRA earnings withdrawn before age 59½ are subject to federal income tax unless certain exceptions apply. Encourage your child to leave as much money as possible in a Roth IRA, so he or she can save a larger federal income-tax-free amount for retirement.
Unfortunately, traditional IRA withdrawals taken before age 59½ have a 10% early withdrawal penalty unless an exception such as higher education expenses applies. Any withdrawals from a traditional IRA must also be included in gross income when filing your taxes. Contact us at 702-870-7999 to learn more about how hiring your children for summer jobs can keep them engaged and productive, benefit your business and help them save for the future.