Did you know that paying your children to work for you can boost your wealth? Believe it or not it lowers the amount of taxes you would have to pay. This advantage of employing your children applies to owners of businesses who file a Schedule C as well as Partnerships in which each partner is a parent of the employed child(ren).
Did you know the wages you would pay your children are exempt from various taxes depending on their age, which helps you pay less in payroll taxes?
The wages of children under age 18 are exempt from:
- Social Security and Medicare taxes
- Federal unemployment tax (FUTA tax)
- State unemployment tax (SUTA tax).
The wages of children between ages 18 and 21 are exempt from:
- FUTA tax and SUTA tax only.
As you can see, you will be able to pay less in payroll taxes while still deducting the wages paid to your children. Another great advantage of employing your children is that their earned income is not subject to Kiddie tax; it is only subject to the child’s tax rate. So hiring your children not only saves you money in payroll taxes, but it can possibly save you money in income taxes.
Did you know children under the age of 16 have limitations on the number of hours they can work?
Children that are 16 and older do not have time standards regarding hours worked per week, however children ages 12-15 are allowed to work three hours on a school day and up to eighteen in a school week. Children under age12 may be employed in advertisements, commercial motion pictures, films, video production, and modeling. In order for that child’s wages to qualify for these benefits, there are several requirements that must be met. The work performed must be done in connection to the business, and the child must actually render the services. Payments must be made to the child and must be reasonable.
Your children will need to file tax returns if their earned income is over $6,200. They will not receive a personal exemption on their return if they are claimed as a dependent on your return. However, they will be able to use the standard deduction, which is the greater of $1,000 or their earned income for the year plus $350. Even if your children are not required to file tax returns, it may be beneficial to do so. Federal and state withholdings are required based on the amount of gross wages and your children may receive them back as a refund if their earned income is $6,200 or less.
When you employ your children, you will need proper documentation in order to show that they are true employees of your business. It is a good idea to create a written job description for your children’s positions. Also, it is important to document the hours your children have worked and to pay them by check for their work performed. All required payroll tax returns must also be filed.
Take the Time
We strongly encourage you to take advantage of this great opportunity and the possibility of lowering your income taxes. Not only does this benefit your business, but it can also benefit your children’s financial knowledge. We are available to assist you in filing the payroll forms and meeting the reporting requirements. Please call us at 926-1050 with any questions.