Hiring Children to Work for Parent’s Unincorporated Business

Here is a tax-saving idea for those who operate a business as a sole proprietorship, a single-member LLC
treated as a sole proprietorship for tax purposes, a husband-wife partnership, or a husband-wife LLC treated
as a partnership for tax purposes. Consider hiring your under age 18 child as a legitimate employee of your
business. It can be part-time or full-time.

Your under age 18 child’s wages are exempt from Social Security, Medicare, and federal unemployment
taxes. In addition, your child can use his er her standard deduction to shelter up te $5,950 of 2012 wages federal income tax (for 2011, the standard deduction was $5,800). Under this arrangement, your child
will probably owe absolutely zero federal taxes en the first $5,950 of wages (for 2012). Your child can set
aside some or all of the wages and invest the money. Hopefully, the cash stash eventually be used to
help pay for college, which means less stress for you.

Meanwhile, you deduct the wages paid to your child as a business expense, es long as they are
reasonable for the Work performed. The write-off will cut your income tax bills and your self-employment
tax bill (if applicable). The write-off will also lower your adjusted gross income, which will lower the odds
of getting hit with unfavorable phase-out rules that can reduce or eliminate various tax breaks.

After your child reaches age 18, Social Security and Medicare taxes will kick in, however no federal
unemployment tax will be due until age 21. The child’s standard deduction will still shelter up to
$5,950 from federal income tax. And, you can deduct the wages and the employer’s share of the related
employment taxes as business expenses.

Even if your business is incorporated, hiring your child can still make tax-saving sense. In this scenario, the
child’s wages are subject to Social Security, Medicare, and federal unemployment taxes regardless eff his or
her age. The good news: The child’s standard deduction still provide an income tax shelter for the child,
and you can claim business deductions for the wages and the employer‘s share of the employment taxes.

Please contact us if you have questions or want more information about this strategy.