Many small business owners are in search of reliable, strong staff during these difficult times. So, why not hire your child (or grandchild)? It could pay off big time. If you have a teenager at home, there’s a number of reasons why you should put him or her to work for you.
Here’s our top 5 reasons why you should hire your child.
- Let’s start with the tax benefits. Did you know that in 2020 your child can earn up to $12,400 ($12,200 in 2019) of income without paying any taxes? This amount is the standard deduction for single filers. You may not even need to file a tax return for them if the total amount of earned income is less than the standard deduction. On your tax return, you can still claim them as a dependent and deduct any qualifying tax credits.
- Depending on how your business is structured, it may benefit from paying zero taxes as well. As long as your business is set up as an LLC or sole proprietor and your child is under the age of 18 years old, you are not required to pay any social security or Medicare taxes. If you own an S-Corp or C-corporation, however, you are required to withhold income taxes and FICA taxes. Your child will most likely get these withholdings back when s/he files their tax return.
- You can deduct payroll costs (wages, benefits, and taxes) for your employed child as an eligible business expense. So long as your child has reached a reasonable working age and is hired to perform a reasonable job, you can deduct expenses for functions such as cleaning, maintenance, delivery, administrative duties, warehousing, or customer service.
- Give them experience and teach them what you know. Educating the next generation on work ethic, industry knowledge, and the value of a dollar are important life lessons, not to mention solid succession planning (should you wish to transfer the business to them in the future). By hiring your child, they’ll learn ways to be responsible and reliable, traits that will carry them throughout their life.
- It’s never too early to start saving for retirement. In fact, the earlier you start, the easier it is. You can teach them valuable savings opportunities and crunch the numbers together, giving them various options on how to use and invest their earnings. For 2020, the IRA contribution limit is $6,000, but it cannot be more than 100% of earned income. So, if your child earns $5,000, then the contribution limit is $5,000. It may be advantageous to skip the traditional IRA and go for a Roth IRA, given the amount of time your child has before the retirement years.
Be sure to always keep accurate records of their work hours and job functions to support your tax returns. If you have any additional questions on how to maximize your tax savings, contact me at stu@erocktax.com or call the office line at (781) 247-5569.
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About Stu: With more than 30 years of experience as a tax professional, Stu Steinberg brings a broad depth of knowledge to his work with his clients. Stu founded Erock Tax to help provide tax and financial planning strategies to individuals, families and small businesses and is passionate about empowering his clients through education about their money health. Stu is highly energetic and brings a sense of optimism, creative problem-solving and a deep level of commitment to every Erock client.