Summer is right around the corner, and you might be thinking about hiring an intern for your small business, especially if this is your busy season. However, before you start that search, you may want to consider hiring your own teenage son or daughter.
Although working with your child may seem too close for comfort, you may want to think again when you consider the financial and tax benefits. Take a look at some of the money-saving advantages to hiring your child.
4 Small Business Advantages to Hiring Your Own Child
If your child is under the age of 18, you can deduct up to $6,300 in wages as a business expense. This will lower your small business’s gross income, and your child will pay no taxes on earnings by claiming the standard deduction on his tax return.
If you operate a sole proprietorship or partnership (where both partners are the child’s parents) and your child is under 18, he won’t have to pay social security or Medicare taxes. You also won’t have to withhold payroll taxes. In addition, if your child is under 21, you won’t have to pay unemployment taxes either, according to the IRS.
Child Tax Credit
You can claim your child as a dependent on your taxes and also benefit from the Child Tax Credit.
If your child wants to get a leg up on investing, he can earmark up to $5,500 of his 2016 earnings in after-tax dollars towards a Roth IRA. Funds can be withdrawn tax-free at age 59 ½. This is a great way to encourage your kids to start saving for their future at a young age.
Although the financial benefits may be the biggest reason you employ your child this summer, there are other advantages that have nothing to do with money, including teaching your son or daughter important values like hard work, responsibility, and accountability.
Rudy Piantedosi knows about this firsthand, as he first hired his son Michael, now a college senior, in the summer of 2011 to work at his two companies: Rudy’s Tree & Landscape and Commonwealth Landscape Lighting in Acton, MA. Michael worked at the landscape companies during college summer vacations, and upon graduation, he’ll begin working full-time at the family business.
“The number one lesson Michael learned was responsibility. He also learned what it takes to work for and run a service company,” says Piantedosi.
Do It Right
Once you’ve decided to hire your child, it’s time to make sure you handle payroll properly so that you and your small business won’t be faced with future accounting or tax problems.
Here are some tips:
Commit to fair wages
Pay your child a reasonable amount for the job description. Although it may be enticing to take a bigger tax deduction by paying a higher hourly rate, if you’re paying more than you should for the job position, this could raise a red flag with the IRS.
Watch the age restrictions
Think twice about hiring your child unless he’s old enough to realistically do the job. For example, hiring your eight-year-old to work at your landscaping company just for the tax break might not go over so well with the IRS. In fact, it’s hardly believable that child this age is a legitimate, legal employee at all!
File taxes properly
File proper tax forms just like you would for any other employee. This includes filing a Form W-2 to show how much your child was paid.
Use checks or automatic deposits
Pay your child by check or automatic deposit rather than in cash. If you really want to help your child get a jumpstart on future savings, you can even deposit his paychecks right into a Roth IRA account.
Use a formal employment agreement
It’s a good idea to have your child sign an employment agreement that outlines job responsibilities and hours. That way, if the IRS or your accountant needs to see more specific records, this information will be readily available.