If your business operates as a sole proprietorship, single-member LLC or husband-and-wife-owned LLC partnership, you can take advantage of some big tax savings by hiring your kids! There are some tax savings available to C and S Corporation owners, but not nearly as much as the other business entities.
Normally, when a business sets up payroll, the business is responsible for paying the following payroll taxes:
• 50% of FICA (Social Security and Medicare taxes) The employees pay the remaining 50%.
• 100% of unemployment taxes
Depending on your relationship to the employee, qualifying LLC owners and sole proprietors get a big break on these payroll taxes. By hiring your child (under the age of 21), your business does not have to pay unemployment taxes. By hiring your child (under the age of 18), your business does not have to pay ANY payroll taxes (Social Security, Medicare, or unemployment). If you decide to hire your parents or your spouse, your business does not have to pay unemployment taxes.
Let’s look at an example to see all of the tax savings:
Your business operates as a single-member LLC and you decide to hire your 15 year-old son to work part-time at the business. You decide to pay him $9,000 for one year of work. Assume you are in the 28% tax bracket. Your business gets to deduct $9,000 as wage expense, and because your son is under the age of 18, the business does not owe any payroll taxes. Here is a breakdown of the total federal tax savings:
Self-employment tax savings: 15.3% (SE Tax rate) x 92.35% (Payroll savings*) x $9,000 (wages) = $1,271
This reduces your SE Tax deduction by $635 (50% of $1,271). Your total federal tax savings are: ($9,000 (wages) – $635 (SE Tax deduction)) x 28% (income tax) = $2,342
Your son will need to file a tax return for his earned income as well. He will take the standard deduction of $6,300 and pays tax on the remaining income at the 10% bracket.
($9,000 (wages) – $6,300 (standard deduction)) x 10% (income tax) = $270
Total Family Federal Tax Savings: $1,271 + $2,342 – $270 = $3,343
*Federal Payroll Tax Savings = 100% – 6.2% (Social Security) – 1.4% (Medicare) – .05% (Unemployment) = 92.35%
If your business operates as a husband-and-wife-owned LLC partnership, you can still reap the payroll tax benefits of hiring family members. The only caveat is that the family relationship to the hires must be the same for all partners.
There are a couple things to remember when hiring your children. Your kids must actually do work for your company! Also, you cannot pay them more than non-family employees are earning for the same type of work. You’ve got to treat your kids just like any other employee! Also, make sure you keep records showing what you paid your kids and their work hours. The tax savings outlined above will disappear if you do not take the proper steps to add your kids to your payroll system and to provide them with a W-2 at the end of the year. Remember, it’s always form over substance with the IRS!
Unfortunately, corporations don’t receive the family tax break for payroll taxes. Corporations that hire family members need to pay payroll taxes (Social Security, Medicare and Unemployment). However, the smaller tax benefits of hiring your child in your corporation are better than the zero tax savings associated with gifting your child money.
Also, the Kiddie Tax does not apply to earned income. So, if your child earns a wage from your business, it’s not going to cause the Kiddie Tax to kick in.
There are a few non-tax-related benefits to hiring your kids as well. Working for your business will help your child to learn more about the family business, to establish a good work ethic, to learn money management, and to spend more time with you!
If you’d like us to help you add your children or other family members to your payroll, give us a call today!