Attention business owners- hiring your child as an employee this summer might be a smart tax strategy. In most cases, this results in tax savings to the business owner and little to no tax to the child.

Some Rules:

  1. The child must legitimately be an employee of the business and perform the services.
  2. Your child is of age to handle the position they are being hired for.
  3. The wages paid are of fair market value for the services performed.

What are the tax savings?

  1. The business owner will receive a business deduction for the wages paid.
  2. For businesses subject to self-employment tax, the wages will be a deduction reducing your self-employment income.
  3. Your child can use the standard deduction to fully offset wages of $12,550 or less for 2021 and pay nothing in federal income taxes.
  4. If your child is under the age of 18 and your business operates as a sole proprietor, single-member LLC taxed as a sole proprietorship or an LLC owned by you and your spouse taxed as a partnership, the wages paid to your child will not be subject to Social Security or Medicare tax.
  5. If your child is under the age of 21 and your business operates as a sole proprietor, single-member LLC taxed as a sole proprietorship or an LLC owned by you and your spouse taxed as a partnership, the wages paid to your child will not be subject to federal unemployment tax.
  6. The wages paid to your child could provide the necessary earned income needed to allow them to contribute to a Roth IRA providing great long-term tax savings.

Give ClarkSilva a call to find out how putting your child to work this summer can provide a tax break!