If you own a business and have a child in high school or college, hiring him or her for the summer can provide a multitude of benefits, including tax savings. And hiring your child may make more sense than ever due to changes under the Tax Cuts and Jobs Act (TCJA).
How it works
By shifting some of your business earnings to a child as wages for services performed, you can turn some of your high-taxed income into tax-free or low-taxed income. For your business to deduct the wages as a business expense, the work done must be legitimate and the child’s wages must be reasonable.
Here’s an example: A sole proprietor is in the 37% tax bracket. He hires his 20-year-old daughter, who’s majoring in marketing, to work as a marketing coordinator full-time during the summer. She earns $12,000 and doesn’t have any other earnings.
The father saves $4,440 (37% of $12,000) in income taxes at no tax cost to his daughter, who can use her $12,000 standard deduction (for 2018) to completely shelter her earnings. This is nearly twice as much as would have been sheltered last year, pre-TCJA, when the standard deduction was only $6,350.
The father can save an additional $2,035 in taxes if he keeps his daughter on the payroll as a part-time employee into the fall and pays her an additional $5,500. She can shelter the additional income from tax by making a tax-deductible contribution to her own traditional IRA.
Family taxes will be cut even if an employee-child’s earnings exceed his or her standard deduction and IRA deduction. Why? The unsheltered earnings will be taxed to the child beginning at a rate of 10% instead of being taxed at the parent’s higher rate.
Avoiding the “kiddie tax”
TCJA changes to the “kiddie tax” also make income-shifting through hiring your child (rather than, say, giving him or her income-producing investments) more appealing. The kiddie tax generally applies to children under age 19 and to full-time students under age 24. Before 2018, the unearned income of a child subject to the kiddie tax was generally taxed at the parents’ tax rate.
The TCJA makes the kiddie tax harsher. For 2018-2025, a child’s unearned income will be taxed according to the tax brackets used for trusts and estates, which for 2018 are taxed at the highest rate of 37% once taxable income reaches $12,500. In contrast, for a married couple filing jointly, the 37% rate doesn’t kick in until their taxable income tops $600,000. In other words, children’s unearned income often will be taxed at higher rates than their parents’ income.
But the kiddie tax doesn’t apply to earned income.
Other tax considerations
If your business isn’t incorporated or a partnership that includes nonparent partners, you might also save some employment tax dollars. Contact us to learn more about the tax rules surrounding hiring your child, how the kiddie tax works or other family-related tax-saving strategies.
© 2018
Hey there, I love all the points you made on that topic. There is definitely a great deal to know about this subject, and with that said, feel free to visit my blog Webemail24 to learn more about Addiction Rehabilitation.
Your blog has really piqued my interest on this topic. Feel free to drop by my website Seoranko about Infertility Treatments.
Hi there, I simply couldn’t leave your website without saying that I appreciate the information you supply to your visitors. Here’s mine Autoprofi and I cover the same topic you might want to get some insights about Accident Car Purchase.
Great site with quality based content. You’ve done a remarkable job in discussing. Check out my website Articlecity about Social Media Marketing and I look forward to seeing more of your great posts.
Bookmarked, so I can continuously check on new posts! If you need some details about SEO, you might want to take a look at Articleworld Keep on posting!
What fabulous ideas you have concerning this subject! By the way, check out my website at Article Sphere for content about Rental Car Services.
Superb posts! Have a look at my page Article Star where I also put in extra effort to create quality information about Data Mining.
Your ideas absolutely shows this site could easily be one of the bests in its niche. Drop by my website ZH5 for some fresh takes about Airport Transfer. Also, I look forward to your new updates.
Having read your posts. I believed you have given your readers valuable information. Feel free to visit my website YW9 and I hope you get additional insights about Internet Marketing as I did upon stumbling across your site.
You made some really good points on your post. Definitely worth bookmarking for revisiting. Also, visit my website QU6 for content about Cosmetics.
Thank you for sharing your precious knowledge. Just the right information I needed. By the way, check out my website at 87N about Article Marketing.
For anyone who hopes to find valuable information on that topic, right here is the perfect blog I would highly recommend. Feel free to visit my site 63U for additional resources about Entrepreneurs.
This is some awesome thinking. Would you be interested to learn more? Come to see my website at 92N for content about Airport Transfer.
Impressive posts! My blog UQ5 about Airport Transfer also has a lot of exclusive content I created myself, I am sure you won’t leave empty-handed if you drop by my page.