The New York Times recently reported that the 2008 job market is shaping up as the weakest in 50 years for teenagers seeking summer work. (Welcome to the real world, kids!) But if you own a business you can create real savings by hiring your kids for the summer or maybe even for the entire year.
Here are the rules:
· Wages you pay to children (or grandchildren, and even parents) are a deductible business expense if you pay them to perform bona fide work for your business and you pay them reasonable compensation for that work.
· Your child can earn up to the standard deduction for single taxpayers ($5,450 for 2008) before they owe regular tax on their income. The next $8,025 is taxed at just 10%. Earned income is not subject to the "kiddie tax" for children under 19, or dependent full-time students under 24.
· The Tax Court has approved payments to children as young as seven years old. Several commentators have suggested paying children under that age to model for your marketing materials -- but that is untested, and would require you to determine a "reasonable compensation" for that work. (Better have an awfully cute kid!)
· Your child's work should be directly related to your business.
· "Reasonable compensation" is an amount that would be similar to amounts paid for similar services by similar businesses under similar circumstances -- with adjustments made for the employee's age and experience.
· To verify your a child's employment, keep a time sheet showing dates, times, and services performed.
· Pay your child by check (to verify payment from the business) and deposit the check in an account in the child's name (to verify payment to the child). The account could be a Roth or regular IRA, Section 529 College Savings plan, or even a custodial account where you manage funds yourself.
· You can't use funds from a custodial account for obligations of parental support. However, private and parochial school, summer camps, and similar "extras" aren't considered "obligations" of parental support. You've got lots of places to put those wages besides your kids' "pizza and Nintendo" fund.
· If your business is taxed as a proprietorship or partnership (and, in the case of a partnership, you and your spouse own all of the partnership interest), no FICA is due on your child's wages until they turn 18. No FUTA is due until they turn 21.
Hiring family members creates obvious tax savings by shifting income to lesser-taxed children. But it also may let you establish employee benefit programs, like the Section 105 Medical Expense Reimbursement Plan and Education Assistance Plan, on their behalf if you have the right fact pattern.
Hiring kids should be a key year-round strategy.
Here are the rules:
· Wages you pay to children (or grandchildren, and even parents) are a deductible business expense if you pay them to perform bona fide work for your business and you pay them reasonable compensation for that work.
· Your child can earn up to the standard deduction for single taxpayers ($5,450 for 2008) before they owe regular tax on their income. The next $8,025 is taxed at just 10%. Earned income is not subject to the "kiddie tax" for children under 19, or dependent full-time students under 24.
· The Tax Court has approved payments to children as young as seven years old. Several commentators have suggested paying children under that age to model for your marketing materials -- but that is untested, and would require you to determine a "reasonable compensation" for that work. (Better have an awfully cute kid!)
· Your child's work should be directly related to your business.
· "Reasonable compensation" is an amount that would be similar to amounts paid for similar services by similar businesses under similar circumstances -- with adjustments made for the employee's age and experience.
· To verify your a child's employment, keep a time sheet showing dates, times, and services performed.
· Pay your child by check (to verify payment from the business) and deposit the check in an account in the child's name (to verify payment to the child). The account could be a Roth or regular IRA, Section 529 College Savings plan, or even a custodial account where you manage funds yourself.
· You can't use funds from a custodial account for obligations of parental support. However, private and parochial school, summer camps, and similar "extras" aren't considered "obligations" of parental support. You've got lots of places to put those wages besides your kids' "pizza and Nintendo" fund.
· If your business is taxed as a proprietorship or partnership (and, in the case of a partnership, you and your spouse own all of the partnership interest), no FICA is due on your child's wages until they turn 18. No FUTA is due until they turn 21.
Hiring family members creates obvious tax savings by shifting income to lesser-taxed children. But it also may let you establish employee benefit programs, like the Section 105 Medical Expense Reimbursement Plan and Education Assistance Plan, on their behalf if you have the right fact pattern.
Hiring kids should be a key year-round strategy.
