Many of our clients operate and own their own businesses, and when appropriate, they employ their children to do certain tasks and jobs around the office or for the benefit of the business. The key concept is the child has to be capable of and perform the services for which they are being paid.
Although the recent change of tax reform eliminated all personal exemptions, it did increase the standard deduction/for single taxpayers (aka, your children who are not married and are still considered your dependents) to $12,000. In 2017, the standard deduction for a single person was $6,350. In most years, the work assigned to your child was generally in the $5,000 to $6,000 range to take advantage of this strategy.
Now, if appropriate, this means you can increase the amount of pay to your children which will in turn decrease the amount of income you report on your own returns. If you are a single member LLC who has not elected to be taxed as a corporation, or regular schedule C and your child is under age 18, the child is also exempt from FICA taxes.
By using this strategy, you not only move taxable income from your bracket to a zero bracket, but you also save on the FICA tax. In addition, if they are under 21, they are exempt from federal unemployment taxes as well.
To illustrate the available tax savings, let’s assume your taxable income that was derived from a Schedule C business is $300,000. Keeping it very simple, your tax on $300,000 as a married filing joint taxpayer would be $60,579, and your self-employment tax would be $24,200. For each child you are able to pay $12,000, you reduce your income tax by $2,880 and your self-employment tax by $348 for a total tax savings per child of $3,228.
The strategy also works if you own an S-corp or a C-corp, but the exemption from FICA tax does not apply.
If you can hire your children, tax reform provides you with a great benefit with the new $12,000 standard deduction. The key here is if you can hire your children, and they can do age-appropriate work. Please call us and we can help you determine what is age-appropriate based on our knowledge of your business and our experience with other businesses that use this strategy.
If you have any questions, please feel free to reach out to any of the tax professionals at WSW, and we will be glad to answer any questions you may have.