- Higher Standard Deduction
- IRA Options
- Self-Employed Parent
- Employing Your Child
- Tax Benefits
Summer is just around the corner, and your children may be looking for summer employment. With the passage of the most recent tax reform, the standard deduction for single individuals jumped from $6,350 in 2017 to $12,000 in 2018, meaning your child can now make up to $12,000 from working without paying any income tax on their earnings.
In addition, they can contribute the lesser of $5,500 or their earned income to an IRA. If they contribute to a traditional IRA, they could earn up to $17,500 tax free, since the combination of the standard deduction and the maximum allowed contribution to an IRA for 2018 is $5,500. However, looking forward to the future, a Roth IRA with its tax-free accumulation would be a better choice.
Even if your child is reluctant to give up any of their hard-earned money from their summer or regular employment, if you have the financial resources, you could gift them the funds to make the IRA contribution, giving them a great start and hopefully a continuing incentive to save for retirement.
With vacation time just around the corner and employees heading out for their summer vacations, if you are self-employed, you might consider hiring your children to help out in your business. Financially, it makes more sense to keep the family employed rather than hiring strangers, provided, of course, that the family member is suitable for the job.
Rather than helping to support your children with your after-tax dollars, you can instead hire them in your business and pay them with tax-deductible dollars. Of course, the employment must be legitimate and the pay commensurate with the hours and the job worked. A reasonable salary paid to a child reduces the self-employment income and tax of the parents (business owners) by shifting income to the child.
If the business is unincorporated and the wages are paid to a child under age 18, the pay will not be subject to FICA (Social Security and Medicare taxes) since employment for FICA tax purposes doesn’t include services performed by a child under the age of 18 while employed by a parent. Thus, the child will not be required to pay the employee’s share of the FICA taxes, and the business won’t have to pay its half either.
A similar but more liberal exemption applies for FUTA, which exempts from federal unemployment tax the earnings paid to a child under age 21 while employed by his or her parent. The FICA and FUTA exemptions also apply if a child is employed by a partnership consisting solely of his or her parents. However, the exemptions do not apply to businesses that are incorporated or a partnership that includes non-parent partners. Even so, there’s no extra cost to your business if you’re paying a child for work that you would pay someone else to do anyway.
If you have questions related to your child’s employment or hiring your child in your business, please give this office a call.