25 Jun / Child Employed by Parents
Child Employed by Parents
If you are the owner of a small business that is taxed as a sole proprietor, or a partnership owned wholly by husband and wife, then your child may be exempt from paying FICA tax and FUTA for federal tax purposes. In order to qualify the child must be under the age of 18.
What is the Benefit
If a taxpayer hires their minor child to work in their sole proprietorship and pays them $4,000 gross per year, the income is no longer report on the parents return. A minor who are dependent of there parent making $4,000 would pay zero in income taxes on this income. Additionally this income would not be subject to FICA tax. The FICA tax on the wage would be $306.00 plus there would not be the match so the total FICA saving would be $612.00. The savings in Federal taxes would be dependent on the parents tax rate but on a $4,000 wage could save anywhere from $600 to $1,000.
Who is not Eligible
If your business is organized as a C-Corporation or and S-Corporation then your minor child is not exempt from FICA tax. The Minor Child would however be exempt from FUTA tax.
In addition to the tax saving your child will benefit in multiple ways. They will have an opportunity to learns more about what the parent does for a living, they will likely learn a skill, how to communicate and work with adults and begin to understand the idea of the commitments necessary to hold a job.
Jeffrey W. Schultz, CPA is the founder of Schultz & Associates, CPA PLC located in Plymouth Michigan since 2004. Additional articles can be found on the firm’s website on their #taxesarehard blog.