SelfInformed

July 2013


Ask The Experts: Hiring Your Child

Tuesday, July 02, 2013


Q: I remember reading an article in your magazine a few years ago that said something like if you pay your 15-year-old child $500 per month until they are 21 years old and they save the money in an account, it would be worth over a million dollars when they turned 50. Can you clarify the specifics of this for me?

A: I believe you’re referring to the concept of hiring your child. The idea is a great planning strategy and really a no-brainer for the sole proprietor who has a child who can 
help in the business.

Here are the facts: You are probably already giving your 15-year-old child a significant amount of money each year. Not just an allowance, but also college savings, gas money, clothing, sports and extracurricular activities—all of these items add up to a big number!

 Instead of just giving your child the money or transferring your after-tax dollars into a college savings account, why not create a job for your child? Put them to work by finding something in your business that they can do to help. Have them work a couple of hours after school during the week, and then maybe four or five hours on the weekend. Pay them a reasonable wage, such as $12.50 an hour, and before you know it you’re paying them about $6,000 a year in wages. These are wages from a real job, with a real job description, real payroll tax returns, a real W-2 at the end of the year, and all of the applicable paperwork for a real employee.

The good news is that the wages that a child younger than 18 earns working for their parent’s sole proprietorship up to $6,100 are tax free. The child doesn’t even have to file a tax return. But for you, the sole proprietorship, that $6,000 in wages paid to your child is fully tax deductible as wages on Line 26 of your Schedule C form. That deduction reduces your taxable income and your income subject to self-employment tax. So, a small-business owner in the middle income tax bracket of 25 percent will save over $2,400 in taxes by creating this new job. That is 25 percent for federal income tax and 15.3 percent in self-employment tax for a total of 40.3 percent or $2,418.

The best news of all is that this was money that you were already spending. Creating a job and paying your child $6,000 per year and having them deposit that money in a savings account would be a tremendous idea for the long term. 

Keith Hall, NASE Tax Expert

GET MORE ANSWERS


The NASE’s small-business experts are here to help you understand the ins and outs of operating a successful small business. And access to these professionals is free with your NASE Membership!

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