Hiring Your Child: Key Tax and Labor Rules Every Business Owner Needs to Know.
Navigating the complexities of hiring your child in your business? We'll cover essential tax and labor law considerations, including minimum age requirements, payroll, and potential tax benefits. Ensure compliance and foster a positive work experience for your family.
Hiring your child can be a win-win: offering them valuable work experience and your business potential tax benefits. However, it's vital to understand the specific tax and labor rules that apply to avoid any legal complications.
Key Tax and Labor Law Considerations:
Minimum Age Requirements: The Fair Labor Standards Act (FLSA) establishes minimum age requirements for employment.
Generally, children must be at least 14 years old to work in non-agricultural jobs.
Younger children may be allowed to work in certain jobs, such as delivering newspapers or working for their parents in their business, under specific conditions.
Be sure to check with your state's labor laws, as they may have additional restrictions.
Payroll and Taxes: Even if your child is working for your business, you'll still need to follow standard payroll procedures.
Obtain an EIN (Employer Identification Number) if you haven't already.
Withhold income taxes, Social Security, and Medicare taxes from your child's wages.
File the necessary tax forms, such as Form W-2 at year-end.
Potential Tax Benefits:
If your business is unincorporated (sole proprietorship or partnership), your child's wages may be exempt from Social Security and Medicare taxes if they are under 18 years old.
Your child's wages can be deducted as a business expense, which may lower your business's taxable income.
Consider setting up a Roth IRA for your child. They can contribute their earned income, providing valuable tax-free growth for their future.
Child Labor Laws: Familiarize yourself with child labor laws to protect your child's health, well-being, and education. These laws may restrict:
The types of jobs your child can perform.
The hours they can work.
When they can work.
Documentation: Keep meticulous records of your child's employment, including:
Dates of employment.
Hours worked.
Wages paid.
Taxes withheld.
This documentation will be essential in case of an audit.
Key Tax Forms:
Form W-2: A W-2 must be filed if gross wages paid to the employee for the calendar year are $600 or more, regardless of any tax withholding. This is important for documenting the child's earned income for a Roth IRA contribution and substantiating the business expense deduction if questioned by the IRS. Failure to file can result in penalties.
Forms 941 and 940: Form 941 is required if the business pays wages subject to federal income tax withholding or Social Security and Medicare taxes. Even if the child's wages are exempt from Social Security and Medicare taxes, they are still subject to federal income tax withholding. Form 940 is necessary if the business meets specific wage or employee count thresholds.
Hiring your child in your closely-held business can be a smart tax strategy that involves income shifting. The child's wages are deductible for the business, and the child reports the income, potentially at a lower tax rate, resulting in tax savings. This strategy also allows the child to contribute to a Roth IRA, enjoying tax-free compound growth.
Important Considerations:
Business Structure Matters: If the business is a sole proprietorship or a partnership where the parents are the only partners, there are significant tax advantages. If the child is under 18, neither the business nor the child has to pay Social Security and Medicare taxes. If the child is under 21, the business does not have to pay unemployment taxes.
Corporations are Different: If the business is a corporation, both the child and the corporation must pay all payroll taxes. Hiring a child in this case may still make sense if the overall tax savings from income shifting outweigh the payroll tax costs.
Key Points:
Income Shifting: The core of the strategy is to shift income from the parent (higher tax bracket) to the child (likely lower tax bracket).
Tax Savings: Potential tax savings arise from the child's lower tax rate and the business's deduction for wages.
Roth IRA: The child's earned income can be contributed to a Roth IRA, providing tax-free growth for their future.
Age and Business Type: Tax benefits regarding payroll taxes are contingent on the child's age and the type of business.
Consult a Tax Professional: This strategy involves tax complexities, so consulting a tax professional is highly recommended.
Remember, tax laws can be intricate and subject to change. Always seek professional advice to ensure compliance and maximize the benefits of any tax strategy.
In Conclusion
Hiring your child can be a rewarding experience for both of you. By understanding and following the necessary tax and labor rules, you can ensure a smooth and successful working relationship while enjoying the potential tax benefits.
Disclaimer: This blog provides general information and shouldn't be considered tax or legal advice. It's always best to consult with a qualified professional for advice specific to your situation.