Richard A. Lindsey, CPA Lindsey & Waldo, LLC – Certified Public Accountants
  • Hiring Your Children for the Summer – The Job of Last Resort or Just Good Tax Planning?

    Filed under Taxes
    Aug 6

    When times were better, many students looking for summer employment and graduates looking for permanent jobs thought of the family business only as a last resort. In today’s economy, however, the family business may be the only place for some kids to find work. But all is not lost. Employing your child may save you some taxes regardless of how your business is organized.

    Income Shifting. Regardless of how a business is organized, the owners may be able to turn some of their higher-taxed income into tax-free or low-taxed income by employing their children. In addition to providing valuable work experience for your offspring, this arrangement can offer significant tax savings to the business. As long as the work your children do is legitimate and you follow all the rules and they receive reasonable wages, you can deduct their wages as a business expense and shift the money to your child in a (presumably) lower tax bracket.

    Example: You are in the 33% tax bracket and you hire your son, John, to help with your business full time during the summer and part-time into the fall. John earns $5,700 during the year and doesn’t work elsewhere during the year. If that $5,700 would have otherwise gone into your pocket, then you saved $1,881 (33% of $5,700) in income taxes at no cost to your son, who can use his $5,700 standard deduction for 2010 to completely shelter his earnings.

    The total taxes for your family are cut even if John’s earnings exceed the standard deduction amount. That’s because the unsheltered earnings will be taxed to him beginning at the 10% rate instead of  being taxed at your higher rate.

    As an added bonus, if your business is an unincorporated sole proprietorship or a partnership consisting of only you and your spouse and your son or daughter is under age 18, you don’t have to pay Social Security or Medicare taxes on the wages you pay.

    Example: Take the information from the example above and let’s say you usually take home $120,000 from your sole proprietorship. Now, in addition to the income tax savings above, you save $153 (the 2.9% HI portion of the $5,700) because your self-employment income is reduced and John saves $436 (.0765 x $5,700) in employee FICA just because he worked for you instead of someone else.

    Since the income earned by John is earned income it isn’t subject to the Kiddie Tax. Just be sure to file W-2 forms and other necessary tax forms for John.

    Caution. The Hire Incentives to Restore Employment Act (HIRE Act) carried two valuable incentives for employers that boost payroll this year: a payroll tax holiday for employers that hire unemployed workers and an up-to-$1,000 tax credit for keeping those new hires on the payroll for at least one year. Neither of these tax breaks is available for hiring your child.

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