In an article titled “Hiring Your Children is Good Business,” the Virginia Society of Certified Public Accountants (VSCPA) offers suggestions to small-business owners who want to hire their children. Here is an excerpt:
The reasonable wages you pay your minor child to work are fully deductible as a legitimate business expense, lowering your gross income. In 2006, you can pay your child up to $5,150 without either of you incurring a tax liability. For your child, the standard deduction eliminates the tax on his or her income.
If your business is unincorporated, hiring your children can reduce payroll taxes as well. Under current law, wages paid to a child under age 18 are not subject to the Federal Insurance Contributions Act (FICA): Social Security and Medicare taxes. In addition, wages paid to a child under 21 are exempt from the Federal Unemployment Tax Act (FUTA). Both the FICA and FUTA tax exemptions also apply if the child is employed by a partnership in which each partner is a parent of the child.
To properly qualify for the deduction, the work that your children perform must be necessary for the business, and the wages must be reasonable for the type of work performed. Be sure to keep good records — have your child track his or her hours on a timesheet or punch a time clock. There is no age limit for employing your child.
Pay your child by check at the same intervals that you pay other employees. At the end of the year, issue a W-2 form to each of your children who worked in the business and send a copy to the IRS.
For college-bound children, keep in mind that money held in the child's name could reduce the amount of financial aid available to them.
For more information, visit the VSCPA Web site at
www.vscpa.com.
