Business News for Kids - What are Taxes?
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It is best to work out an agreement with your ex or soon-to-be-ex before filing to avoid inadvertent problems — otherwise, you will have to work out the issue through the IRS Customer Service department to determine if you have a reasonable claim to the credits or if you will just have to forgo the claim.
If you e-filed, you will have to resubmit a paper copy to allow the IRS to apply the tiebreaker rules. In the end, the custodial parent has control.
Hiring Children In The Family Business For Tax (And Other) Benefits
However, if you have a more complex issue, you should consult with a qualified tax attorney to advise you on the best path to take. News Back. Facebook Twitter Comments Print. New bill takes on the ObamaCare 'cadillac tax' Sen.
Continue Reading Below. In addition to non-financial benefits, such as the ability to spend more time together note: child may not find this to be as much of a benefit as the parent! Together, these benefits can produce significant tax savings in the right situations. And while state income taxes may apply to those amounts in certain situations, if the child is at a lower Federal rate than their parents, they will also generally be at an equal or lower state income tax rate, too making the potential income tax savings even greater!
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In contrast, income generated from employment — including employment by a parent — is earned income. Thus, the Kiddie Tax does not apply to such amounts, and the full amount of the Standard Deduction and availability of lower tax brackets is permitted.
Should people without kids pay higher taxes?
For business owners at or near the new qualified business income QBI deduction phaseouts , the tax savings can be even more significant. In addition, the wages paid to a minor child count as wages paid for the wages or wages-and-depreciable-property tests for the QBI deduction. It can also help to preserve up to the full QBI deduction for non-SSTB business owners with incomes within or above their applicable phaseout range.
Though notably, that also means the child will not accrue Social Security benefits based on those earnings either , nor even start accruing any quarters of coverage to qualify for Social Security and Medicare benefits in the future. Furthermore, sole proprietorships, single-member LLCs, and partnerships where both parents are the only partners of the business are not responsible for Federal unemployment FUTA taxes on children under Such businesses, however, may still owe state unemployment taxes.
Thus, the child should still receive a W-2 from the business. Do nothing and hire the child via the corporation — One option for a parent looking to hire their child to work for their wholly-owned potentially with the other parent corporation is to simply accept the restrictions and hire the child anyway. And ostensibly at least some of the Medicare or Social Security taxes would have been paid by the parents if the income was allocated to them anyway.
Your Kids Could Lower Your Tax Bill Like Never Before
Thus, even with some FICA and FUTA tax obligations, there would still be a tax savings to employing the child in the business, especially for higher-income business owner parents. However, given the many changes created by the Tax Cuts and Jobs Act , including the potential advantages of non-corporate entity structures for certain business owners with respect to the qualified business income tax deduction , a change in entity structure may make sense anyway. The additional employment tax savings of hiring a minor child would just be a cherry on the top!
Create another business and employ children there — Another, more aggressive approach to saving on employment taxes for parents looking to hire their child to work for their wholly-owned potentially with the other parent corporation is to establish a separate sole proprietorship or single member LLC or partnership where both parents are the only partners family management company.
The separate employment-tax-savings-eligible family management company would then contract with the S corporation to provide services, and the family management company would the hire the children to provide those services. For example, the family management company might other services like answering the phones, computer support, or social media marketing. There should be little doubt that, of all the possibilities discussed here, this is the most aggressive. And while, in theory, there should be nothing preventing a parent from engaging in such a series of transactions, in the event of an audit, count on the IRS digging deeper and asking questions.
And of course, even in a best-case scenario, the family management company would be the employer of the children, meaning that the family management company would have to run payroll, issue the W-2s, and file a tax return likely a Schedule C. This extra work may negate all or part of the benefits of establishment for some business owners. While families can often enjoy a material amount of income tax savings and potentially FICA and FUTA tax savings as well by employing and paying children in the family business, an immediate income tax savings is not the only benefit of the strategy.
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Future tax rates are reasonably uncertain. If your child is an employee of your business, they are generally entitled to the same employee benefits as other employees. That could include benefits such as HSAs, FSAs, or being able to contribute to or receive contributions on their behalf into other retirement plans as well. If, in addition to hiring your child you also wanted to include them when making SEP contributions, you would probably want to set up your plan so that younger workers are allowed to participate.
On the other hand, if you wanted to exclude your children from receiving SEP contributions under the plan, leaving the typical defaults in place make sense typically preventing employees from participating if they are under But like most financial decisions business owners face, before moving forward, there are important things to consider that may make the decision less appealing than it would seem at first glance. Rather, just like any other employee, you should be hiring your child to provide bona fide services to your business.
Common work-related activities minor can perform include cleaning, filing, answering the phones, and other clerical work. In addition, many children today are far more versed in computers, information technology, and social media than their parents. In all cases, though, be certain that the work being assigned is not only age-appropriate to the child themselves, but is age-appropriate to the relevant Federal and state child labor laws.
The reality, though, is that reasonable has two boundaries. You should also try to pay your child cash or at least, electronically via payroll into an online bank account , whenever possible, to minimize concerns over conflated work with parental responsibility. Although Federal laws allow salaries to be paid in property e. For instance, in July , Patricia Diane Ross — of all things, a paid tax preparer — was denied by the Tax Court for deductions related to having paid her children in largely pizza , despite keeping decent records and receipts.