Now that you’ve mastered how to save taxes, it’s time to expand your ideas. In this article, we will explain why hiring one or more family members to work in your business could be a smart move to save money.
That could help your business and your family deliver favorable tax results to both the newly employed family member(s) and your business (a double benefit!).
Hiring Your Under-18 Child to Work in Your Sole Proprietorship / Husband-Wife Partnership Business
Let’s say you operate your business as either a sole proprietorship, a single-member LLC that’s treated as a sole proprietorship for tax purposes, a husband-wife partnership, or an LLC that’s treated as a husband-wife partnership for tax purposes;
That means you can hire your under-18 child, and the child’s wages will be completely exempt from Social Security and Medicare taxes (FICA tax) and FUTA taxes.
The FICA tax exemption applies to the employee’s share of FICA tax that’s withheld from the employee’s paychecks and to the employer’s share of FICA tax that your business must pay over to the Fed.
- For 2020, your under-18 employee’s standard deduction will shelter from federal income tax the first $12,400 of wages received if the child has no taxable income from other sources. No federal income taxes are paid for this child.
- You can hire the under-18 child part-time, full-time, whatever works for you and the child.
- The wages received by your child can be used to help keep the family afloat financially. If the family is not so financially stressed, your child can use some or all of the wages to fund a college savings account/make a Roth IRA contribution.
- HOWEVER, if you operate your business as an S or C corporation, your child’s wages received from the business are subject to Social Security and Medicare taxes (FICA tax) and FUTA tax regardless of the child’s age.
Tax Advantages for Your Business:
When you hire a child or other family member, your business deducts the wages paid:
- If you operate the business as a sole proprietorship, a single-member LLC that’s treated as a sole proprietorship for tax purposes, a husband-wife partnership, an LLC that’s treated as a husband-wife partnership for tax purposes, or an S corporation, the wage expense deduction reduces (a) your individual federal taxable income, (b) your individual net self-employment income, and (c) your individual state taxable income (if applicable), which can help save tax.
- If you operate the business as a sole proprietorship, a single-member LLC that’s treated as a sole proprietorship for tax purposes, a husband-wife partnership, or an LLC that’s treated as a husband-wife partnership for tax purposes, wages paid to your under-age-18 child are exempt from the employer’s share of FICA tax, as explained earlier. If your employee-child is over age 17 but under age 21, the FICA tax exemption disappears, but the wages are exempt from FUTA tax.
- If you operate the business as a C corporation, the corporation deducts the wages paid to a child or other family member, helping you save tax. These deductions reduce the corporation’s federal taxable income and probably the corporation’s state taxable income (if applicable).
- If your business will be unprofitable this year due to the COVID-19 fallout, deductions for wages paid to a child or other family member can create or increase a net operating loss (NOL) for 2020. If so, you can carry back the 2020 NOL for up to five tax years—back to 2015. The NOL carryback can trigger a refund of income taxes paid for the carryback year. That can really help. An NOL carried back to a pre-2018 tax year can be especially helpful, because tax rates were generally higher in those days.
Disclaimer:
Legislations and tax rules can change; please make sure to talk to your CPA and/attorney before you take any decisions.