With the end of the school year just a few weeks away, it may be time to consider hiring your son or daughter for the summer. There are several advantages to hiring your children (or grandchildren), if you structure their employment properly. It is unlikely they will earn enough during the summer months to pay significant income taxes (if any), but your business will still earn a deduction for the payroll.
Here are some important tips to keep in mind:
- Set up a Roth IRA for your child. You can contribute up to $5,500 (so long as the amount does not exceed the child’s 2016 earnings). The amount you contribute counts toward your annual $14,000 gift tax exclusion (or $28,000 if you combine it with your spouse’s exclusion). It sets a good example of saving and financial planning, withdrawals after age 59 are tax-free, and the child can take out up to $10,000 to buy a first home when the time comes.
- You can block withholding taxes. If your child owed no taxes in 2015 and does not expect to owe any in 2016, you can simply enter “Exempt” on their W-4. This won’t work if your child can still be claimed as a dependent, or earns more than $1,050 in total income. Also, they may still be hit with the 7.65% Social Security and Medicare tax.
- No federal unemployment tax. You won’t have to pay federal unemployment tax on a child until he or she reaches age 21.
- No FICA tax. Sole proprietorships and husband/wife partnerships who hire their children who are under the age of 18 do not have to pay FICA tax on their wages. Same applies to a one-person LLC.
Working with your children can be a rewarding experience. Make sure it is also financially rewarding for both them and your business. For more information on this or other tax topics, please contact Gray, Gray & Gray’s Tax Department at (781) 407-0300.