If you put your own child on the payroll full time for the summer or even part time throughout the school year, there are a number of valuable benefits for the business and your child.
Getting the help your business needs
In today’s tight labor market, it is challenging for small businesses to hire needed employees. According to a survey from CNBC and Survey Money, 52% of small businesses said it’s harder to find workers today than a year ago. Hiring your own child to work in the company may be just the answer to your employment needs.
And there’s a bonus. If your company is a family business, or you intend it to become one, having your child gain experience with you may be what’s helpful to convince your child to make this his/her career after graduation.
Payroll tax savings
If your child is below a set age, the business may not owe any FICA—a savings of 7.65% for the business and the employee on earnings up to $132,900 in 2019—and FUTA—a savings for the business of 0.6% on the first $7,000 of wages. For FICA, the child must be under age 18. For FUTA, the child must be under age 21. The exemption from payroll taxes applies only if the business is a:
- Sole proprietorship
- Partnership owned by spouses only
- Limited liability company with one member that is a disregarded entity (i.e., files Schedule C like a sole proprietorship)
Tax-free income for your child
Depending upon total earnings from the job and other sources for the year, your child may not have to pay any federal income tax on the wages received. In 2019, a child who meets the definition of “dependent” (even though there is no dependency exemption) can earn up to $12,200 in 2019 tax free. In fact, federal income tax return is required to filed for income up to this threshold amount.
The child may be able to claim exemption from income tax withholding on the wages. Eligibility for exemption in 2019 means:
- Not paying any income tax in 2018 (any taxes paid were fully refunded).
- Expecting to owe no federal income tax in 2019. This means that if the child has any investment income, it does not exceed $350.
An exemption claim is made by checking “exempt” on line 7 of Form W-4.
Retirement savings for your child
You can put your child on the road to a lifetime habit of savings and a financially comfortable retirement by encouraging his/her to save some earnings in a Roth IRA (the child likely does not need the deduction created by a traditional—deductible—IRA). This will create tax-free income in the future. For 2019, the contribution limit is 100% of earnings, up to a maximum of $6,000.
If your child does not contribute his/her earnings, you can make a contribution on your child’s behalf. Again, this must be based on the child’s earnings. There is no minimum age requirement for having a Roth IRA.
Final thought
While there are benefits to both the business and your child in a work arrangement, there can be issues to face. Be sure that you acknowledge them and handle them wisely.
Remember the Chinese proverb: “A family in harmony will prosper in everything.”
