If you operate your Maine-based business as a sole proprietorship, a single-member LLC (which is treated as a sole proprietorship for tax purposes), or a husband-wife partnership, here’s a great family tax planning deal: Hire your under-age-18 children as legitimate employees of the business. It doesn’t matter if they work part-time or full-time.
This idea makes sense because your teenagers can set aside some or all of the wages earned and invest the money. The investment earnings and gains will be taxed at low rates. Later, your child’s savings can be used to help pay for college, which means you won’t have to come up with quite as much cash.
There’s a couple of other advantages too:
- Your child’s wages are exempt from Social Security, Medicare, and federal unemployment taxes. Your child can use their standard deduction to shelter a good amount of wages from federal income taxes
- As the business owner, you will get a Schedule C business for money you might have given to your child anyway. The write-off reduces both your federal income and self-employment taxes. Your adjusted gross income is lowered too.
After your child reaches 18 and is considered an adult, the Social Security and Medicare taxes kick in. As the employer, you’ll pay half and the other half will be withheld from your child’s wages.
It’s important to remember that you must pay wages that are reasonable for the work performed. Keep the same records as you would for any other employee.
For more information about the tax benefits of hiring your child to work for your small business, contact Filler & Associates.