Close

Tax News

Back to Article List

Putting Your Kids on the Payroll

Share this article...

Putting Your Kids on the Payroll

Should you paying your child(ren) to assist you in your business? Perhaps! Putting kids to work in the business is a good option to both teach them work ethics and potentially provide a handsome tax benefit to the owner(s).

Note: Kiddy tax does not apply to earned income.

So Here is How it Works.

Tax Advantages
You can pay each child up to the amount of the standard deduction for that child $12,000 in wages, without incurring a taxable income for that child.  In 2018, the standard deduction is $12,000, therefore you can pay each child up $12,000 without the child incurring any taxable income. This does not prohibit you from taking that child as a dependent.

Example of Savings (effective tax rate of 23.2%) $12,000 X 23.2%= $2,784 tax savings per child

You could also pay your child more money since their tax bracket is probably lower than yours. This will likely cause them to have taxable income, which will no doubt be at a lower tax bracket than your own. 

Example of Savings (Your tax bracket 24%, child’s 10% (First $9,525 in 2018)

Tax savings from above on the first $12,000: $2,784

Tax Savings on next $9,525:  $9,525 X (24%-10%) = $1,333.50

Total Savings for $21,525 of income for your child: $2,784 + 1333.50= $4,117.50

You can continue this saving up until your tax bracket is equal to your, at which out the saving stop.

What if you cannot do without the cashflow?

After payroll is processed, they can gift up to maximum gift allowance (2018: $15,000) per year back to you

What about the payroll taxes?

For regular LLCs (taxed as a sole proprietorship) or partnerships in which each partner is a parent of the child, if your child is under 18, the business does not have to pay employment taxes such as Social Security, Medicare and Workers’ Compensation Insurance. You can also avoid Unemployment taxes until the child turns 21.

All other entities are required to pay payroll taxes which reduces the overall tax benefit to just the difference between the owner’s and the child’s tax brackets (assuming the owner is not maxed out on social security wages).  Not as big a home run but still beneficial

Retirement Accounts
Your child can contribute to an IRA, it will reduce your taxes even further

A child can contribute to an IRA (2018: $5,500) on their personal return and therefore absorb nor income before it becomes taxable or a Roth IRA and contribute 100% of earned wages up the maximum contribution.

Tax savings from above on the first $12,000: $2,784

Tax savings from above on the next $5.500: $1,276

Tax Savings on next $9,525:  $9,525 X (24%-10%) = $1,333.50

Total Savings for $27,025 of income for your child: $2,784 + $1,276 +1333.50= $5,509.50

Company-Sponsored Retirement Plan
A company-sponsored plan could be a SIMPLE, SEP or 401k plan. The usual age for these types of plans is 21, but the plan may be created or adopted to be as low as 14 years of age. Remember, once adopted this applies to all eligible employees

Example: If the child contributes to a Simple 401lk, the plan allows your child to contribute maximum (2018: $12,500) to a Simple 401k or the maximum limits on SIMPLE’s and SEP’s which can be significant. In turn the business gets an instant deduction and the kid gets your money, albeit a bit early.

Tax savings from above on the first $12,000: $2,784

Tax savings from above on the next $5,500: $1,276

Tax savings from above on the next $12,500: $4,292

Tax Savings on next $9,525:  $9,525 X (24%-10%) = $1,333.50

Total Savings for $39,525 of income for your child: $2,784 + $1,276+4292 +1333.50= $9,685.50

What are the requirements:

The tax law does not have a minimum age, but a child should probably be 7 or great, based upon the Eller case.  Parent employing their children are generally not subject to child labor laws.  Parents are prohibited from employing their child in manufacturing or mining or in occupations that involve the following activities declared hazardous by the Department of Labor:

  • Manufacturing and storing of explosives
  • Driving a motor vehicle and being an outside helper on a motor vehicle (other than the delivery of newspapers to consumers where youth are exempt from the labor laws
  • Logging and saw milling
  • Working with power-driven woodworking machines
  • Being exposed to radioactive substances
  • Working with a power-driven hoisting apparatus
  • Working with power-driven metal-forming, punching, and shearing machines
  • Meatpacking or meat processing (including the use of power-driven meat-slicing machines)
  • Working with power-driven bakery machines
  • Working with power-driven paper product machines, including scrap-paper balers and paper-box compactors
  • Manufacturing brick, tile, and related products
  • Working with power-driven circular saws, band saws, and guillotine shears
  • Wrecking, demolition, and ship-breaking operations
  • Roofing operations and all work on or about a roof
  • Excavation operations

Additional considerations:

Insure both a bona fide employer-employee relationship, and a performance of services for the business.

Planning tip. Make sure that you pay a reasonable wage based on a time sheet submitted in a timely manner.

Another issue to consider is support. If your child is 18 or younger and not a student, it doesn’t matter. But if your child is going to college and the parents are paying him/her to work at the family business, for the parents to take the dependent exemption of the child, they must provide over half of the child’s support. This gets tricky, but there are easy arguments for it.

 

PDF
Printable PDF

Have a Question About This Topic?

I confirm this is a service inquiry and not an advertising message or solicitation. By clicking “Submit”, I acknowledge and agree to the creation of an account and to the Terms of Use and Privacy Policy.

NEVER MISS A STORY.

Sign up for our newsletters and get our articles delivered right to your inbox.

 

Track Your Refund

 
Track Federal Refund Check Federal Amended Return Refund

Check your State Refund

Client Login

 

Refer a Friend

.