The Advantages Of Hiring Your Minor Children For Summer Jobs
If you’re a small-business owner and you hire your children this summer, you may be able to secure tax breaks and other nontax benefits. The kids can gain bona fide on-the-job experience, save for college and learn how to manage money. You may be able to shift some of your high-taxed income into tax-free or low-taxed income, and, depending on the situation, you may realize payroll tax savings. Perhaps best of all, your kids will spend time with you.
A legitimate job and tax savings, too
If you hire your child, you’ll get a business tax deduction for employee wage expenses. In turn, the deduction reduces your federal income tax bill and possibly your self-employment tax bill and your state income tax bill if they apply. However, for the wages to be a deductible business expense, the work performed by the child must be legitimate and the child’s pay must be reasonable.
Let’s say you operate as a sole proprietor in the 37% tax bracket. You hire your 16-year-old daughter to help with office work full-time during the summer and part-time in the fall. She earns $10,000 during 2024 and doesn’t have any other earnings.
You save $3,700 (37% of $10,000) in income taxes at no tax cost to your daughter. That’s because she can use her $14,600 standard deduction for 2024 to completely shelter her earnings.
Your family’s taxes are lower even if your daughter’s earnings exceed her standard deduction. Why? The unsheltered earnings will be taxed to her beginning at a rate of 10%, instead of being taxed at your higher rate.
Reduced payroll taxes
If your business isn’t incorporated and certain conditions are met, your child’s wages are exempt from Social Security, Medicare and federal unemployment taxes. Your child must be under age 18 for this to apply (or under age 21 for the federal unemployment tax exemption). Contact the office to learn how this works.
Be aware that there’s no payroll tax exemption for employing your child if your business is incorporated or is a partnership that includes nonparent partners. And payments for the services of your child are subject to income tax withholding, regardless of age, no matter what type of entity you operate.
Extra time to make your child’s retirement garden grow
An early start on saving for retirement can be key to building wealth. A child who earns income from a job can contribute to a traditional IRA or a Roth IRA and begin funding a nest egg. For the 2024 tax year, a working child can contribute the lesser of his or her earned income or $7,000 to a traditional or Roth IRA. And the money may be tapped penalty-free for certain eligible reasons, such as paying education costs and making a down payment of up to $10,000 on a first home.
What if your business has a retirement plan? Depending on its terms, your child may qualify to begin earning retirement benefits that can grow for many decades.
The importance of accurate records
Hiring your child can be a tax-smart idea. Be sure to keep the same records (such as timesheets and job descriptions) as you would for other employees to substantiate the hours worked and duties performed. Also issue your child a Form W-2. Contact the office with questions about how these rules apply to your situation.
To Get An “Early” Refund, Adjust Your Withholding If you received a large refund this year, you may want to adjust your withholding. Each year, millions of taxpayers claim an income tax refund. To be sure, receiving a payment from the IRS for a few thousand dollars can be a pleasant influx of cash. But it means you were essentially giving the government an interest-free loan for close to a year, which isn’t the best use of your money.
Fortunately, there’s a way to begin collecting your 2024 refund now: You can review the amounts you’re having withheld, and any estimated tax payments you’re making, and adjust them to keep more money in your pocket during the year.
Choosing to adjust
It’s particularly important to check your withholding and/or estimated tax payments if you have:
- Received an especially large 2023 refund,
- Gotten married, divorced or added a dependent,
- Bought a home, or
- Started or lost a job.
Withholding or estimated tax payment changes might also be warranted if your investment income has changed significantly.
Making a change
You can modify your withholding at any time during the year, or even more than once a year. To do so, simply submit a new Form W-4 to your employer. Changes typically will go into effect several weeks after the new Form W-4 is submitted. For estimated tax payments, you can adjust each time quarterly payments are due.
While reducing your withholding or estimated tax payments will put more money in your pocket now, you also need to be careful that you don’t reduce them too much. If you don’t pay enough tax throughout the year on a timely basis, you could end up owing interest and penalties when you file your return, even if you pay your outstanding tax liability by the deadline in April 2025.
Getting help
One reason to consider adjusting your withholding is the passage of any new tax legislation. For example, several years ago when the Tax Cuts and Jobs Act was enacted, the IRS needed to revise withholding tables to account for the increased standard deductions, suspension of personal exemptions, and changes in tax rates and brackets. If you’d like help determining your withholding or estimated tax payments for the rest of the year, please contact the office.