As the IRS website states: “One of the advantages of operating your own business is hiring family members.” That family member can be a spouse, sibling, parent, or even a child (between the ages of 3-18). In fact, while hiring a child may not seem like a top- of-mind move for many businesses owners, if you play by the rules there can be a surprisingly broad array of tax benefits to doing so!
With the Tax Cuts and Jobs Act increasing the Standard Deduction up to $12,200.00 (in 2019), children employed in a family business can earn that much in income and enjoy a zero-tax rate on their income. In addition, many states will also permit children employed in the business to avoid unemployment (FUTA) taxes and children working for their parents’ sole proprietorship, partnership, or LLC, may also avoid employment (FICA) taxes as well , which can be a material tax savings for many families, especially those with high-income parental business owners. This allows you to reduce the amount of income you need to take home personally by $12,200.00 per child which results in paying less in personal taxes.
Furthermore, employing a child in the business also creates earned income that can qualify the child to make a Roth IRA contribution, and/or qualify the child for other employee benefits. This means that you can take $6,000.00 of the $12,200.00 and place it in a Roth IRA, which will grow completely tax free until your child is able to withdraw it at the age of 59.5 years of age. Just one of the many ways to create Generational Wealth.
With the remaining $6,200.00, it can be put into a children’s bank account with parental control and used to cover things like, Sports, Band, Dance, and other hobbies your child or children may enjoy. When you personally cover these expenses, they are not tax deductible to you as an individual.
Although the caveat is that employing a child in the business still requires that he/she d o bona fide, age-appropriate work in the business for a “reasonable” wage. The work must also comply with the Federal Fair Labor Standards Act (FLSA) rules which fortunately are flexible for parents employing their children in their own wholly-parental-owned business and state child labor laws as well.
Let me qualify the above. If your LLC or Corporation is taxed as a “C” Elected or “S” Elected company, you will need to withhold taxes just like any other employee.
Let’s discuss how you can implement this in your business, contact our offices at 775-384-8124 or send an email to firstname.lastname@example.org
Scott L. Arden, CEO
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