Summer is approaching quickly, which means teenagers will be looking for summer jobs. If you own a business, it can be a wise move to place your child on the payroll. Below are some positive tax outcomes from hiring your child into your family business:
- A child’s earned income is not subject to the kiddie tax. A family business will get a tax deduction for the child’s salary and this will reduce the parent’s taxable income. In most cases, the parents’ marginal tax rate will be significantly less than the child’s rate, resulting in tax dollars saved.
- The child will earn income that they can use to make a contribution to an IRA. It is important to discuss with a tax professional or investment advisor what type of IRA is most beneficial.
- The child’s wages are considered earned income which means they can be wholly or partially sheltered from income tax by an increase in the allowable standard deduction for kiddie tax. For example, if your child has $5,000 of earned income, they will have no income tax but the family business will still get its deduction. This income tax shelter is relative to the amount of earned income the child acquires.
If you have questions about your child’s income or any other tax related matters, please contact our Tax Department at (781) 407-0300.