Does your college kid come home over winter and summer break without lining up a job? Or is your high schooler bored at home? If you are a business owner, it’s not too late (or too early) to bring them into the family business! While hiring your child may seem like a questionable business decision, it can be beneficial. Hiring your child is not only a great opportunity to teach a good work ethic, but there is an added bonus. There can be tax savings. Plus, it’s a great way to have extra help around the office!
Before hiring your child, there are a few steps you should take:
- Make sure your child is eligible for employment. For more information from Florida Department of Business & Professional Regulation, visit here.
- Complete all necessary employment forms, including the Employment Eligibility Verification Form I-9 and a W-4 form for withholding.
- Determine your child’s wage. In general, it’s a good idea to pay your child the same amount that you would if you hired through normal avenues. It’s important to document your child’s hours and services and pay him/her regularly using your payroll system.
Once your child has become your employee and on the books, you have the opportunity to save on taxes. If your child is under 18, the dreaded Federal Unemployment Tax Act does not apply and they may also be exempt from state unemployment taxes. Plus, you are not required to pay Social Security or Medicare taxes for your child.
As any business owner knows, the combination of these exemptions can be quite significant. However, these exceptions only apply to sole proprietorships or limited liability companies that are owned by you and/or your spouse. Unfortunately, if you have an S- or C-corporation that includes nonparent partners or corporations, you do not have the same benefits. If this is the case you need to submit a W-2 form to the IRS and withhold typical payroll taxes.
As your child will now have earned wages, they (ha, you) can contribute to an IRA for them or better yet a Roth IRA for them. This is a great thing to do!
Now that you know the tax benefits outweigh the cons, you might be a little less reluctant to hire your child.
Paul Herman, a tax expert for individuals and businesses, is the founder of Herman & Company, CPA in Boynton Beach, FL. After many years of “Big Eight” experience, Mr. Herman founded Herman & Company with the belief that growing businesses and successful individuals deserve a level of attention that the large firms simply cannot provide. Now, more than 25 years later, Mr. Herman continues to provide guidance and strategies to improve clients’ financial well-being. For more information, visit hermancpa.com or call 561-922-7330.
Sponsored: This post was sponsored by Paul Herman, CPA. All opinions expressed in this blog post are my own and not influenced in any way by the sponsor. Any statistic, quote or other representation about a product or service should be verified with provider. Please refer to this site’s Disclosure for more information. I have been compensated or given a product free of charge, but that does not impact my views or opinions.
