CARL WATTS & ASSOCIATES

November 12, 2012

www.carlwatts.com
office@carlwatts.com
Washington DC
 tel/fax 202 350-9002
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Hiring Junior
Family Members
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Nevertheless, payment for the services of a child are subject to income tax withholding, regardless of age.

So, if, for instance, you hire your child under 18 years of age for the summer you only have to pay income tax withholdings.

Apart from these savings, as a sole proprietor you can deduct the wages you pay your child as a business expense. If you hire more than one of your children you can deduct wages paid to each one of them.

The wages paid to junior are taxed at a lowest rate of 10%, that is after the $5,950 standard deduction for 2012. For your son or daughter, the standard deduction may eliminate all of the tax on the child’s income.

So basically you are turning your high-taxed income into tax-free or low-taxed income for your child.

The 10% tax bracket works even for a child who is subject to the kiddie tax, which causes the child's investment income in excess of $1,900 (for 2012) to be taxed at the parent's marginal rate. The kiddie tax has no impact on the child's wages and other earned income.

The kiddie tax doesn't apply to a child who is age 18 or a full-time student age 19 through 23, if the child's earned income for the year exceeds one-half of his or her support. Thus, employing a child age 18 or a full-time student age 19–23 could also help to avoid the kiddie tax on his or her unearned income. To find out more abut the kiddie tax, read one of our previous newsletters.

Your business also may be able to provide your child with retirement benefits, depending on the type of plan it has and how it defines qualifying employees.

You can have your child bank this money to help pay for future education expenses. If your child opens a Roth IRA, he or she can use the money for education with no penalty when the time comes; if they decide not to use the money for college, they’ll have a head start on retirement savings.

If you're audited, be prepared to show that the money you paid your child was reasonable for the work they performed, comparable to what you would have had to pay someone else to do the work.

To be on the safe side, have your child keep a time sheet, note the tasks performed and keep records of each paycheck.

Without a doubt, on top of the tax advantages of hiring your minor child, there are many non-pecuniary advantages.

Your child will gain work experience and develop new skills, thus increasing self-confidence.; your parent-child relationship can be enhanced and at the same time you’ll get some practical help to lighten your workload.

Of course, everyone’s financial situation is different. A CPA or financial advisor can help you identify the right course of action for your business and your family.
If you are a sole proprietor or in a partnership where you and your spouse are the only principals, then you should know the tax advantages and other savings you can benefit from by hiring your minor children.

Let us first determine under what conditions a child may be employed.

The Fair Labor Standards Act (FLSA) sets 14 as the minimum age for most non-agricultural work. However, at any age, youth may deliver newspapers; perform in radio, television, movie, or theatrical productions; work in businesses owned by their parents (except in mining, manufacturing or hazardous jobs); and perform babysitting or perform minor chores around a private home.

Regardless of family employment, kids can't work during school hours and not more than three hours per day, 18 hours a week total during school. When school is out, kids can work up to eight hours a day, 40 hours per week but not after 9 p.m. during the summer.

Regarding payment, children must be paid at least the minimum wage after their first 90 consecutive calendar days of employment or when they turn 20, whichever comes first. During the first 90 days or prior to a child's 20th birthday, families can pay as little as $4.25 per hour.

Examples of jobs your child might perform for your business include filing and other office tasks, designing and maintaining a website or handling social media, helping with mailing, or running errands.

The IRS requires that the work you hire your child to perform be reasonable and necessary to the business. If you could reasonably be expected to hire someone to do the job, you can legally hire your child.

Now that you know the employment conditions, let’s see what those tax advantages we mentioned in the beginning are.

The IRS rules that payments for the services of a child under age 18 who works for his or her parent in a trade or business are not subject to social security and Medicare taxes if the trade or business is a sole proprietorship or a partnership in which each partner is a parent of the child.
Also payments for the services of a child under age 21 who works for his or her parent in a trade or business are not subject to Federal Unemployment Tax Act (FUTA) tax.

However, there is no FICA or FUTA exemption for employing a child in an incorporated business or in a partnership that includes non-parent partners. The children are subject to the same rules that apply to all other employees.




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