An article in ‘Practical Tax Strategies,’ a magazine for tax professionals, recently detailed out the significant tax savings that can be had by hiring your children to work in your business.  The article, written by C. Andrew LaFond, CPA and Bruce A Leauby, Phd., CPA state that the ‘tax benefits associated with hiring a child depends on the age of the child, the type of business hiring the child, and whether certain other benefits are provided.”

Sole proprietors hiring children under the age of 18 receive a special benefit related to social security and medicare.  The child, as an employee, does not have FICA withheld, and the employer does not have to match it.  Additionally, if the employer pays less than the standard deduction amount (roughly $5,000), the child pays no income tax.  Assuming a tax rate of 25%, the tax savings is a little over $2,000.  Even if the child has to pay income tax, they will likely pay at a lower rate (around 10%), which shifts income from a high bracket, to a lower bracket.  High earning sole props may also see a savings in the ‘Additional Medicare Tax’ of .9% which begins in 2009.

Corporations are not availed the special treatment of children in relation to FICA taxes, however, taxpayers still have the ability to shift income.

Children must be treated as bonafide employees, with appropriate duties, a reasonable wage, and proper documentation.

Significant benefits can also be had through the child’s participation in retirement accounts, educational assistance programs, and health reimbursement accounts.  For more information on what may qualify, please contact our office.