Paying Kids to Work for Dad

[Mike H]

I am a home construction general contractor. I have two teenagers that I would like to hire to do work for me. I hear there are some tax breaks for hiring one's own children. How much can I pay them before they have to pay tax on the earnings?

[Armando Beaujolais]

Hiring Kids

The bad news first.

If you hire your kids, (1) they actually have to do the work, (2) you actually have to pay them and keep records, file payroll reports, etc., and (3) you can't pay them more than what could be considered reasonable.

Now the good news. There are some serious tax breaks for parents who hire their kids.

There are three main items that provide a tax benefit for paying wages to children.

(1) Payroll tax exemptions. A child employed by the parents in an unicorporated business is not subject to FICA (SS & Medicare) if under age 18. That's a savings of 15% right off the bat.

(2) Child's standard deduction. A child is eligible for a standard deduction of $5,000 if all the income is from wages. There's no exemption for the dependent, but the standard deduction is still available.

(3) Retirement plan deduction. This can increase the amount a child can earn and not be subject to tax.

For example, let's say mom owns a sole proprietorship and has $90,000 in net profit. She and Dad have a combined marginal rate of 35% federal plus state. Sonny wants to work in the business. Mom hires Sonny and he earns wages of $9,000. Mom deducts the $9,000 from her Schedule C income. That lowers Mom's taxes by $4,500 (35% income tax + 15% SE tax). Sonny is under 18 so there's no FICA. Mom makes Sonny put $4,000 into an IRA, which is deductible on Sonny's return. Sonny's AGI is $5,000, which leaves zero taxable income after his standard deduction. Mom's going to be forking over money to Sonny anyway. This way she saves $4,500 in taxes, puts $4,000 of that into an IRA for Sonny, and has $500 left over to buy Dad a new trolling motor for Father's Day.

[Scarecrow]

Mom makes Sonny put $4,000 into an IRA, which is deductible on Sonny's return.

Sonny protests saying he is too young to be thinking about retirement. Mom takes away his car until he changes his attitude. Sonny complains about the older generation always telling teenagers what to do. Mom grounds Sonny for life for talking back. Sonny runs off in the middle of the night with his girlfriend Cher. Low on dough Sonny gets the bright idea to start a band. Sonny and Cher get discovered and go on to make billions.

And now you know...the rest of the story.

caw

[Armando Beaujolais]

Sonny and Cher get discovered and go on to make billions.

But Sonny can't carry a tune in a bucket. It'll never happen.

[Bees Knees]

Partnership or Schedule C

But Sonny can't carry a tune in a bucket. It'll never happen.

It'll never happen because attorneys and accountants like you will milk them dry of funds filing un-needed partnership returns instead of putting everything on a Schedule C.

THAT...it is the rest of the story....

Bzzzzzzz