You can save some taxes and they can earn some cash working for your business this summer. While this tax savings strategy has been around for a while, many people are unaware of its existence.
Essentially, when you are a sole proprietor or single member LLC you are able to pay your children under the age of 18 without having to remit or pay any payroll taxes as you would any other employee. This includes federal and state unemployment taxes as well. In addition, the parents get a deduction for the wages paid to the child and potentially the child will pay no income tax on the earnings. Currently a child can earn $6,300 of income without paying any income tax.
Another advantage to paying your children in this situation is the opportunity for them to start saving at an early age for retirement. For children eligible, they can contribute $5,500 into an IRA for themselves, or better yet a Roth IRA. This gives them a head start in saving for retirement.
You will want to make sure you give your children legitimate work for your business and pay them appropriate and fair compensation.
Beyond the numbers, you will keep your kids busy over the summer, teach them some work ethic, and also help them to begin to understand finances and the value of money.
~ Douglas A. Talmage, CPA, CDFA™