Hiring Family Members 

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License Jurisdictions —
CPA: FL, TX

Simply to Help —Helping You
To Keep More Of What You Earn and Helping You To Protect What You Keep

  - Help To Keep Your Life In Balance

  Employing your Child. The income tax advantages you may receive by employing your child include obtaining a business deduction for a reasonable salary paid to that child and reducing your self-employment income and tax by shifting income to the child. The salary paid to your child is considered earned income and thus is not subject to the kiddie tax rules that apply to children under age fourteen. As earned income, the maximum standard deduction available to your child in 1996 is $4,000. Therefore, if you pay your child $4,000 in compensation, the standard deduction eliminates all tax on this income. If your business is unincorporated, wages paid to your child under age eighteen are not subject to social security taxes. In addition to the significant income tax advantages of employing your child, you may be able to provide him or her with fringe benefits such as group-term life insurance and qualified pension plan contributions.

Your child may also make deductible contributions to an IRA of the lesser of earned income or $2,000. These contributions can offset earned and unearned income. Therefore, combining the IRA deduction with the standard deduction, your child could receive $6,000 gross income ($4,000 earned and $2,000 unearned) and pay no tax. If your child does not want to use his or her earned income to fund an IRA contribution, you should consider giving him or her $2,000 to do so (as part of your $10,000/$20,000 annual exclusion gift).

  The correct choice over the long term may be the ROTH IRA.  Usually the Roth IRA will provide a much greater benefit for a person planning to keep the IRA for a long time period.  (More than five years)  The Roth IRA provides tax free income once the qualifications are met - proper retirement age of 59 1/2 and the Roth IRA established for more than five years.  This is not a tax deferral - it is a true tax free income.  There is not tax on the earnings of the Roth - both during the accumulation period and upon withdrawal.  

It is important to remember that, if you employ a family member in your business, you must make certain that the wages are reasonable for the work performed and that the services performed are necessary to the business.

Furthermore you must not violate child labor laws including pay rate, safety and work hours.

Summary:  You get to deduct wages from your business income (reducing your own income tax, your Medicare tax and, potentially, your Social Security tax) and your children may pay zero tax on the income (wiped out by their standard deduction and an IRA contribution).  If your children have other income there may be tax.  You will want to monitor the amount of the income so that for those who can claim a deduction for the dependant, the deduction is not lost.

You don't have to be in business to hire someone.  Payment for actual work performed can be for domestic help.  You will not have a deduction for a business expense, but the child will have income to setup either a Roth IRA or a Traditional IRA.

The setting up of an account early for the child may be more important than any potential tax savings the parents receive.  I can never over emphasize the importance of starting the savings process early - at birth if possible.  If a parent, grandparent or combination thereof were to setup $2,000 in a newborn's account the amount at retirement would astound you:

 65 Years

10%

$1,430,366.22

Of course the value of the $1.4 million will not be what it appears at today's dollar, however it is a very good start!

 Engagement Status Letter ~ WARNING!