Hire Your Kids to Work in Your Family Business

In these tough economic times teenagers have a tough time finding summer employment. If you employ them in the family business, you could receive an unexpected perk! Did you know that employment for FICA tax purposes doesn’t include services performed by a child under the age of 18 while employed by a parent? Let’s say you employ your child for $5,450 in 2010. The $5,450 is important because the child does not have to pay income tax on that amount and the company would not have to pay $416.93 in FICA tax on the child’s income. And the child is now eligible for an IRA! I have a client that has employed their child all throughout high school. Every year she pays the child the “dependent child standard deduction” for wages and she matches that amount to an IRA. What foresight to start the child’s retirement plan while still a teenager!
You have to watch the kiddie tax rules. Kiddie tax causes the child’s investment income in excess of $1,900 to be taxed at the parent’s marginal rate but it doesn’t impact the tax on their wages or other earned income.
The rules are a bit different if you are hiring your college aged child. You will have to pay FICA on them and you will need to consider that if their wages constitute more than 1/2 their support you will not be able to take them as a dependent. But the upside to this is if the child is not your dependent the kiddie tax rules no longer apply and the child will probably qualify for the maximum education credit.