Following one of the country’s most dramatic tax changes in history, hiring your child home for the summer is more appealing than ever. Both your child and your business can receive serious tax advantages should you decide to hire him or her part time. For sole proprietorships, single member LLCs, or husband-wife partnership LLCs, hiring your child for the summer could mean their wages are exempt from Social Security tax, Medicare tax, and Federal Unemployment tax. Additionally, your child is afforded the protection of the standard deduction to shield up to $12,000 of 2018 wages from federal income tax. This is due to the Tax Cuts and Job Act nearly doubling the standard deduction, hiking it from $6,350 in 2017 to $12,000 in 2018. The business itself can receive a tax deduction for employee wages on the summer money that you may have distributed to your child anyway.
For incorporated businesses, hiring a child can allow you to deduct their wages as a business expense as well. The child is again able to elect the standard deduction amount of $12,000 to avoid federal income tax, and can also use their income to fund an annual IRA or save for college. Age is irrelevant to make an annual Roth IRA contribution, so as long as income is earned at the summer job, the employee can make a contribution. For 2018, the lesser of the total summer income earned, or $5,500, is the IRA contribution ceiling for your child-employee. After a few years of minor contributions and a strong interest rate of return, your child could get a great jump start to their retirement savings. Many of these provisions are often unknown to the ordinary layperson, but the attorneys at Rock Fusco & Connelly LLC can help you uncover some of these hidden gems.