if you have a growing and thriving small business, you may be thinking about hiring some help. But, before you put out an ad to find someone new, consider an employee closer to home. Who? Your minor child.
Why? Here's how it can benefit you, them, and the future.
Sole proprietorships and limited liability companies generally pay tax on profits through the owner's individual income tax form. So, the more business expenses you can deduct from your gross income, the lower your income tax and the lower your self employment tax will be. The costs of paying an employee are deductible expenses, lowering your profit when it comes to tax time.
Unlike unrelated employees, though, hiring your minor child if you're a sole proprietor or other pass-through entity means that neither you nor they have to pay into Social Security, Medicare, or federal unemployment taxes. Since the employer normally pays 7.65% or more, this is a significant savings.
Your child can benefit beyond just receiving a paycheck. As mentioned above, they won't have to pay the payroll taxes (another 7.65% as well) out of their pocket. In addition, they get to start a resume that may help provide job experience for getting other work.
As a dependent (either of you or of the other parent), children generally have lower tax rates. If you pay them less than the standard deduction amount--$6,350 in 2017--they usually will not even be required to file an income tax return. Even if they do have to file taxes, their tax rate will likely be exceptionally low due to low income levels.
Hiring your minor child can also help you begin preparing financially for their future. For example, earned income can be contributed to either a traditional or Roth IRA (Individual Retirement Arrangement) to start earning early investment returns. You can contribute up to $5,500 annually in any IRA as long as your child has earned that much in income.
While you and your child may not be thinking about their retirement years just yet, current law also allows them to withdraw from an IRA without additional penalty to do things like pay for college and buy their first home.
If you add the IRA contribution maximum and the standard deduction, this means that you could possibly give your child up to $11,850 per year without them incurring any tax liability. Be sure to work with a qualified small business accountant to ensure setting things up properly to meet this threshold.
It's easy to see how hiring your minor dependent--and treating them a a regular employee--can benefit everyone both now and in the future. Contact your local CPA (Teri J Henderson, CPA, P.A.) with any questions.Share