What You Need to Know!
Children and the Family Business
It is never too early to learn and develop a strong work ethic. Simply put, the best way to learn is through firsthand experience. Family businesses give parents the ability to bestow core business values and acumen to their children. Whether they are young adults or teens, giving them the experience at a young age on how to properly manage money and invest, will not only jumpstart their desire and ability to be financially sound, but will keep them ahead of the curve. It also provides them with a way to start saving for future goals like college or a down payment on a house. In return, you get employees who have a natural sense of commitment, teamwork, and loyalty. Starting them at a young age will give them a deeper understanding of the business and a greater appreciation for your hard work and dedication to continuing its success. They may enjoy the business so much that it becomes a long-term succession plan for you.
On top of these benefits, hiring your children comes with significant tax-saving benefits as well. With the 2022 standard deduction at $12,950, this means your child will pay zero federal income tax on anything they earn up to $12,950. This tax break alone can save you thousands each year and applies to both minors and those over the age of eighteen. Even if your child earns less than $12,950 for the year, you should still have them file a tax return. If your child only has unearned income from dividends and interest, the threshold is $1,150, but if they have both earned and unearned income than it is the greater of $1,150 or their earned income plus $350. Educating them on how to properly file a tax return not only gives them experience managing their finances, but it also allows them to establish credit history. They can even begin earning work credits toward future Social Security and Medicare benefits. For the 2022 tax year, your child must earn $1,510 to obtain a single credit and can earn a maximum of four credits per a year.
With such hefty savings, it is inevitable that individuals will try to abuse these provisions by claiming the tax savings without having their children do any actual work or by inflating their wages. To prevent this, the IRS requires your children to meet a few criteria to qualify for these tax benefits. Criteria includes performing legitimate work, appropriate to their age and skill set, and must exceed normal household chores. Additionally; their work conditions, compensation, and hours must follow federal and state child labor laws. If you do hire your child, make sure they do legitimate work, and you pay them a reasonable wage or you could attract unwanted attention from the IRS.
If your business is a sole proprietorship or a single member LLC, taxed as a sole proprietorship, you might not be required to withhold or pay any Social Security and Medicare tax or federal unemployment tax on your children’s wages. This payroll tax exemption applies to parents who employ their children for either part-time or full-time work. The Social Security and Medicare tax exemption covers parents who employ kids under the age of eighteen, while the federal unemployment tax exemption lasts until they reach twenty-one. This exemption can be used to shift some of the income from your own tax to your child’s rate, which is most likely significantly lower than yours.
With such significant tax savings available, there’s never been a better time to put your children to work. However; hiring your children is just one way you can reduce your yearly tax bill. It is important to have a team of proven professionals to comprehensively review your financial situation and to provide you with a complete picture. This way you will be able to discuss and select an optimal path towards achieving your goals and take full advantage of potential tax saving opportunities. We welcome the opportunity to review your portfolio and estate planning documents to make sure an effective solution is in place to achieve your goals and desires.