Tax Implications of Hiring Your Child for Summer Employment
If you own a business, hiring your child (or grandchild) as a legitimate employee this summer might be a smart tax-savings strategy. Of course, like any tax savings, there are parameters, and depending on any number of factors, tax savings may compute higher, lower or not at all. The actual savings will depend on your tax rate, your child’s tax rate and the entity under which your business operates.
You will receive a business tax deduction for employee wage expenses when you hire your child. This deduction reduces your federal income tax bill, your state income tax bill, and your self-employment tax bill, if applicable. Your child’s wages are also exempt from social security and Medicare taxes if certain conditions are met:
- Your child is under the age of 18
- Your child is a legitimate employee of your business, either full or part-time
- Your child is qualified to handle the job for which they were employed
- Your business is a sole proprietorship; you and your spouse are both the only members of an LLC; or it is a single-member LLC that is treated like a sole proprietorship.
The wages paid to your child under the age of 21 are exempt from federal unemployment tax (FUTA) if your business is a sole proprietorship; you and your spouse are both the only members of an LLC; it is a single-member LLC that is treated like a sole proprietorship or a partnership consisting solely of the child’s parents.
Your child can use the standard deduction to shelter up to $12,550 of wages earned in 2021 to owe nothing in federal taxes.
Your child may contribute to a Roth IRA (vs. traditional IRA contributions), as long as they do not contribute more than they earned for a year.
Benefits of hiring a child part-time who is 21 or older
The benefits of hiring an older child may be less, but still may be significant enough to consider. Savings will be determined based on your tax bracket and your child’s tax bracket.
There are many scenarios to determine if employing your child makes sense for your business.