Believe it or not, if you own a business, hiring your child (or grandchild) as a legitimate employee this summer might be a smart tax-savings strategy. Under the Tax Cuts and Jobs Act (TCJA), you may both benefit from the arrangement. Of course, like any tax savings, there are parameters, and depending on any number of factors, tax savings may compute higher, lower or not at all. The actual savings will depend on your tax rate, your child’s tax rate and the entity under which your business operates.
You will receive a business tax deduction for employee wage expenses when you hire your child. This deduction reduces your federal income tax bill, your state income tax bill and your self-employment tax bill, if applicable. Your child’s wages are also exempt from social security, Medicare and federal unemployment tax (FUTA) taxes if certain conditions are met.
- Your child is under the age of 18
- Your child is a legitimate employee of your business, either full or part-time
- Your child is qualified to handle the job for which they were employed
- Your business is a sole proprietorship, you and your spouse are both the only members of an LLC, or it is a single-member LLC that is treated like a sole proprietorship
The wages paid to your child under the age of 21 is exempt form FUTA if your business is a sole proprietorship, you and your spouse are both the only members of an LLC, it is a single-member LLC that is treated like a sole proprietorship or a partnership consisting solely of the child’s parents.
It is very important that you document everything, particularly days and hours worked, and job description along with the type of work performed. For example, you cannot hire your child to do household family chores, which may free up your time to do more work. Their job must be work-related and they should be paid a fair wage for the work done (do not over-inflate).
Two Points of Additional Savings
Your child can use the standard deduction to shelter up to $12,200 of wages earned in 2019 to owe nothing in federal taxes.
Your child may contribute to a nondeductible Roth IRA (vs. traditional IRA contributions) as long as they do not contribute more than they earned for a year. They may be able to withdraw part of the annual Roth contributions without any federal income tax penalty to pay for college, or for any other reason. However, the benefits come when the contributions are left untouched until retirement.
Is there a benefit to hiring a child part-time who is older than 20?
The benefits of hiring an older child may be less, but still may be significant enough to consider. Again, savings will be determined based on your tax bracket and your child’s tax bracket.
There are many scenarios to determine if employing your child makes sense for your business. Contact us at 401-831-0200 to help you calculate the potential tax savings based on your business and personal particulars.