Does your child need a job this summer? Do you own a business and need some summertime help? If so, consider hiring your child. There may be some exceptional tax benefits for you. If you own an unincorporated business and you employ your child under age 18, their wages are not subject to social security taxes.
What is an unincorporated business?
- Sole Proprietorship
- General Partnership where the only two partners are husband and wife
- Single Member LLC
- Multiple Member LLC where the only two members are husband and wife
What entities don't qualify for this exclusion?
- "C" Corporation
- Subchapter S Corporation
What are the savings involved? Well, let's assume your child earned $5,000. There would be no social security taxes. This would save the employer (you) 7.65% or $382.50. The employee (your child) would save 7.65% or $382.50 for a total savings of $765. Additionally, the child may not have any federal income taxes. In 2009, taxpayers could earn up to $5,700 without having to pay any income taxes. Assuming the parents were in at least a 15% federal income tax bracket, this would save another $750. That's quite a savings, isn't it?
What are some practical considerations?
- Don't get too cute with this by hiring your two-year-old
- Make sure the child is actually working
- Treat them like you would any other employee
- Comply with all of the rules and regulations that are applicable to having employees
ACTION ITEM: Take a look at hiring your children this summer in your business. Eligible employers and their children could get some nice tax benefits.
Thomas F. Scanlon, CPA, CFP®