Back when I was a new mom and did everything by the book, I used to cringe at large families. The moms always looked so worn out. The kids must be starved for attention. And worse, the older ones must spend all of their free time as in-house childcare for the younger ones.
God must have a great sense of humor, because thirteen years later, I am the haggard mom with four kids. Sorry, it’s the sleep deprivation folks. I can tell you from experience, no kid in a large family is starved for attention. If anything, they are starved for alone time.
And my oldest has become my in-house babysitter.
There are ground rules. She gets paid- in cash or direct deposit because she doesn’t trust her sisters not to mess with the allowance app on my phone. Never more than a couple of hours at a time, and never when she is doing her homework.
I will have to tell you, this was a complete parenting game changer. No longer do I have to drag all four kids to a doctor’s appointment. Yesterday afternoon I thought, “Hmm, I should go to barre class.” Five minutes later, I was out the door, kid-free for the next 90 minutes.
What if instead of using my daughter as a babysitter, I wanted to hire her to work in my small business. Even though she’s only 13, she’s got a good eye for detail, speaks well with adults, and loves to research, so it’s not that far fetched of an idea. But is it a good idea?
Guess what folks, hiring your kids (meaning those under the age of 18) for the summer can be a great idea. Your kids learn good old-fashioned work ethic and responsibility. There’s no app for that. And if done properly, emphasis on the done properly, it can result in tax-savings for you.
So what procedures do you need to follow if you hire your kids?
No Fake Jobs
Before we start talking about the exciting tax benefits of employing your kids, I need to make one thing clear. No sham jobs. Your child legitimately has to be involved in your business and not just doing family chores.
Here are a couple examples.
Taking care of her siblings? No. Taking care of the children of employees in an in-house daycare? Yes. Mowing your lawn? No. Maintaining the landscaping at your business? Yes.
You must maintain records of how many hours your kid works and be able to prove that the wages you paid her were reasonable (meaning what you would have paid another person to do the same work).
No withholding? How does that work?
Business owners are not required to withhold any payroll taxes when they are paying their children under the age of 18. The payments are also not subject to social security or Medicare taxes.
It gets even better, you can also waive your kids out of any workers’ comp coverage because you can cover them under your family medical plan.
Okay, so what’s the catch?
It’s a big, technical one. The provision to not without payroll taxes from your children under age 18 ONLY applies to a sole proprietorship or limited liability company (LLC) taxed as a partnership that is owned by mom or dad.
So what if your business is structured as an S- or a C- corporation? You can’t avoid payroll taxes when you pay your kids.
Is there any hope for business owners of S- and C- corporations? To avoid the withholding problem, you could pay your kids out of a family management company owned by mom or dad and set up as a sole proprietorship to support the operations of the corporation. The family management company would need to be paid a management fee by the corporation.
Does all of this sound really complicated? It is. Remember what I said above about doing this properly? We’re talking about the IRS folks. If you are considering hiring your kids this summer, be sure to consult with your tax professional and attorney to make sure you are properly handling your withholding obligations.
No Taxes or Lower Taxes
One more piece of exciting news. Your kids probably won’t be paying any taxes. For 2018 and later, the standard deduction amount for single tax payers is $12,000. That means your kid can earn up to a $1,000 per month from your business and owe no tax on the income.
If your child earns more than $12,000 per year, the income will be taxed at a lower rate than your tax bracket.
I’m not done yet with the exciting news. You can still claim your kid on your tax return as a dependent and take the exemption, even take the Child Tax Credit.
In addition to teaching your kids work ethic and responsibility, you can also teach your kids about retirement savings. Your kids can use their earnings to contribute to a Roth or Standard IRA. Contributions can be pulled out later for college expenses penalty and tax free (or left to continue to grow).
Would you like to see your kid hanging out by the office water cooler this summer? Do your kids work in your business? Leave a comment or send me an e-mail.
Disclaimer: This website is made available for educational purposes only as well as to give general information and a general understanding of the law, not to provide specific legal advice. By using this website you understand that there is no attorney client relationship between you and the publisher. The website should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.
Copyright © 2018 by Siobhán Fitzpatrick Kratovil. All Rights Reserved.Tags: Employment, Taxes