Hiring a minor child may allow you to get the help you need in the business and offer tax benefits as well. If you are a business owner operating a sole proprietorship or partnership where both partners are the biological parents of the child, you can employ that child and take advantage of the benefits available.
The child’s income would be subject to federal withholding. However, if they earn up to the standard deduction for the year ($6,300 in 2016), no tax will be due. They would be exempt from Social Security and Medicare taxes until they are 18 years old unless employed in domestic service which is exempt until age 21. They are also exempt from federal unemployment taxes until age 21. Based on your state guidelines, they may also be exempt from state payroll taxes too.
So how does this benefit affect you? If you hire your minor child to assist in the business (doing age-appropriate tasks for compensation), you will expense this salary reducing your profit in the business, therefore reducing your taxable income for the year. For instance, if your business pays 25% income tax and you pay your child $5,000, you will save $1,250 in income tax. You would also save the Social Security/Medicare employer match that is paid for employees. In our example, that’s an additional savings of $382.50. And don’t forget, most likely you won’t have the state taxes either. Hopefully, some of the wages your child earns are put away for the future (college fund, saving for a car, etc). If you have questions about the federal laws in place to protect minors in your industry, see the Department of Labor website for more information.
You may have your minor children helping in your business, so take advantage of this benefit! If you have questions regarding processing payroll, contact our office at 310-534-5577. We’ll be glad to answer any questions you may have.
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