Tax Tip Tuesdays No. 3: Your Tax Accountant Can Help Your Kids Get a Job and pay for College!
Your Tax Accountant Can Help Your Kids Get a Job and pay for College!
Brown CPA Group, Ltd., – Tax Tip Tuesdays Strategy No. 3: Hire Your Children With Tax-Saving Results
by Ken Smith
A Good Tax Accountant can help your Children get a Job and pay for College – here’s how…
Most Business owners should consider hiring their under-age-18 child as a legitimate employee of the business either part-time or full-time.
Your child can set aside some or all of his wages and invest the money. His investment earnings and gains will be taxed at his low rates, usually 0% for long-term capital gains and qualified dividends, and no more than 10% or 15% on ordinary income from interest and short-term capital gains. (This assumes the dreaded Kiddie Tax does not apply to the child’s investment income.)
Eventually the child’s cash account will be used to help pay for his college expenses, which means that you as the parent will not have to spend quite as much.
There are several other benefits as well. The child’s wages are exempt from Social Security, Medicare, and FUTA taxes. Also, the child can use his standard deduction to shelter up to $6,300 (for 2015) in wages from the federal income tax. This way, the child will probably owe absolutely zero federal taxes on the first $6,300 of wages (for 2015).
The parent’s side of the equation is equally advantageous. Parents get a Schedule C, Schedule F, or Schedule E, business deduction for money she might have just handed over to the child anyway. The write-off reduces both the federal income and self-employment tax bill. The Parent’s adjusted gross income is reduced as well. That means less chance of unfavorable AGI-based phase-out rules reducing the deduction.
So in summary, here’s a recap of the under-eighteen child-as-employee advantages:
• No federal payroll tax on child’s wages.
• No federal income tax on the first $6,300 (for 2015) of the child’s wages.
• Additional business deductions for the Parent.
• Work experience for your child.
• Money is kept in the Parent’s and child’s family instead of going to strangers.
We just discussed under-18 tax advantages. Now let’s discuss the over 18 tax advantages.
Unfortunately, Social Security and Medicare taxes are applied at age 18. However, no FUTA is payable until age 21. As the employer, the parent must pay half the Social Security and Medicare taxes, with the other half withheld from the child’s wages. At 18, the child’s standard deduction will still shelter up to $6,300 (for 2015) from federal income tax and the business still gets a nice business write-off.
If the client’s business is not a sole proprietorship, single-member LLC, or a husband-wife partnership, the child’s wages are subject to Social Security, Medicare, and FUTA taxes regardless of his age. The child’s standard deduction still shelters $6,300 (for 2015) for him, and the parent’s business can still deduct the wages and the employer’s share of employment taxes. So this is still a good tax-saving deal for all concerned.
Remember that the child’s wages must be reasonable for the work performed so teen aged kids must be assigned meaningful duties. The parent should keep the same records as she would for any other employee to substantiate hours worked. Of course, the child should also be issued a Form W-2, just like any other employee.
To schedule an appointment to implement this strategy and others within the context of your unique tax situation, Contact Brown CPA Group, Ltd., at (847) 509-4100.
About the author: Ken Smith is an Enrolled Agent and Senior Staff Accountant with Brown CPA Group, Ltd. We know that success means different things to different people. While a business owner strives to maximize profits, increase efficiency and plan for succession; an individual client is more concerned with tax planning, wealth management, retirement and estate planning. At Brown CPA, we work with you on the total picture. Together, we succeed.