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Hire Your Minor Child for a Summer Job in Your Business

As the school year comes to an end, many parents face the challenge of keeping their children occupied during the long summer months. Hiring your child to work in your business can be a productive solution that not only keeps them engaged but also offers valuable learning experiences. Additionally, it can provide significant tax benefits if done correctly. However, navigating the IRS rules is essential to avoid any pitfalls. Here’s what you need to know.

Tax Benefits of Hiring Your Child

Employing your child in your business can reduce your taxable income, as their salaries are deductible from your business income. If your child is under 18, and depending on your business type, you may not have to withhold Social Security and Medicare taxes from their pay. Moreover, if your child’s annual income is below the standard deduction amount of $14,600 for 2024, they won’t have to pay federal income taxes.

Furthermore, earned income allows your child to contribute to an IRA, giving them a head start on their retirement savings. This can be an excellent opportunity to teach them about financial responsibility and the power of long-term investing.

IRS Rules for Hiring Your Child

To qualify for these tax benefits, you must adhere to specific IRS regulations:

⦁ Real Work for Real Wages – Your child’s employment must be genuine, meaning they must perform actual work that is necessary and appropriate for your business. For example, tasks like data entry, managing social media accounts, or assisting with inventory can be suitable. The work should match your child’s age and skills. For instance, a child who excels in math might help with bookkeeping tasks, while a younger child might handle simpler tasks like cleaning office equipment.

⦁ Reasonable Compensation – It’s crucial to pay your child a fair wage that aligns with what you would pay a non-family member for the same work. This not only ensures compliance with IRS regulations but also helps in tax savings by shifting some of your business income to your child. However, overpaying your child could attract IRS scrutiny. For example, paying a young child an excessive hourly rate for simple tasks is not advisable.

⦁ Business Structure and Tax Implications – The tax implications of hiring your child vary depending on your business structure:

⦁ Sole Proprietorship or Partnership – If your business is a sole proprietorship or a partnership where each partner is a parent of the child, payments to your child under the age of 21 are not subject to Federal Unemployment Tax (FUTA). However, income tax withholding still applies.

⦁ Corporations and Other Entities – If your business is a corporation, a partnership (other than described above), or an estate, your child’s earnings are subject to income tax withholding, Social Security, Medicare, and FUTA taxes, regardless of their age.

⦁ Legal Compliance and Documentation – As an employer, you must comply with all employment and labor laws, including federal and state child labor laws. Federal laws generally allow children to work for businesses entirely owned by their parents but impose restrictions on certain types of work and hazardous conditions.

From a tax perspective, ensure all necessary documentation is completed. This includes filling out a W-4 form, issuing a W-2 form, and keeping detailed records of your child’s work hours and tasks.

Understanding the complexities of hiring your child can be challenging. Consulting a trusted finance or tax professional can help ensure you comply with all IRS requirements and maximize the benefits of employing your child in your business.

By following these guidelines, you can provide your child with valuable work experience, keep them engaged during the summer, and potentially enjoy tax savings for your business.

If you have questions about hiring your minor in your business, contact Saunders Tax & Accounting at www.SaundersTax.com or call us at 301-714-2071. Open Monday – Thursday 9 am to 5 pm. Awarded the Hagerstown Chamber of Commerce “2023 Small Business of the Year” and Hagerstown Hotlist 2024, we have been providing a Less Taxing Life and More Prosperous Solutions for 40 years!

Comments

Earl L. Crawford, Jr. 1937-2024

Earl worked for Goodyear Tire and Rubber Company for 30 years before going into business for himself at Crawford Tire from 1981 until 2019.

Dennis W. Flythe 1953-2024

Denny attended Greencastle Antrim High School and graduated from Delaware State University. He focused on providing for his family and creating a legacy.

Arnold W. Wagaman 1939-2024

Arnie was employed at Mack Truck as a quality control specialist until his retirement; a total of 39 years. In his free time, he enjoyed fishing and gardening.

Farm and Garden Penn State Extension

For the week of July 15, 2024 https://extension.psu.edu/franklin UPCOMING WEBINARS AND EVENTS: Penn State Extension is pleased to continue to provide quality education via a

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