REAP THE BENEFITS OF HIRING YOUR CHILD FOR THE SUMMER
Hiring your children to work in your business can be a win-win situation for everyone. Your kids will earn money, gain real-life experience in the workplace, and learn what you do every day. And, you will reap a few tax benefits in the process. Before you decide if hiring your child is the right thing for your business, learn if it can work for you.
Generally, if your child is doing a legitimate job and the pay is reasonable for the work, his or her salary can be a tax-deductible business expense. Your child’s income can be tax-free to them up to the standard deduction amount for a single taxpayer ($6,350 in 2017). Wages earned in excess of this amount are typically taxed at your child’s rate, which is likely lower than your rate. The following guidelines will help you determine if the arrangement will work in your situation:
- Make sure your child works a real job that he or she can reasonably handle, no matter how basic or simple. Consider tasks like office filing, packing orders, or customer service.
- Treat your child like any other employee. Expect regular hours and appropriate behavior. If you are lenient with your child, you risk upsetting regular employees.
- To avoid questions from the IRS, make sure the pay is reasonable for the duties performed. It’s not a bad idea to prepare a written job description for your files. Include a W-2 at year-end.
- Record hours worked just as you would for any employee. Pay your child using the normal payroll system and procedures all other employees use.
If you have questions, give us a call. Together we can determine if hiring your child is the right course of action for your business and your family. 209-599-5051
Thomas L. Vermeulen
Vermeulen & Company, CPAs
Yes, that’s correct, there are some forms of income you receive that may be tax-free. Here is a list of ten common sources of tax-free income.
- Gifts. Gifts you receive are not taxable income to you. In fact, they are not subject to gift tax to the person giving the gift as long as the gifts received in one year from one person do not exceed $14,000.
- Rental income. If you rent your home or vacation cottage for up to 14 days, that rental income does not need to be reported.
- Child’s income. Up to the standard deduction amount ($6,350 in 2017) in earned income (wages) and $1,050 in unearned income (interest) for children is not taxed. Excess earnings above these amounts could be taxed and $2,100 in unearned income is taxed at the parent’s tax rate.
- Inheritance. In most states, beneficiaries typically do not pay tax on the value of what they inherit. When inherited property is sold by the beneficiary, however, there may be a capital gains tax obligation.
- Roth IRA earnings. As long as you meet this retirement account type’s rules, earnings in a Roth IRA are not taxed.
- Life insurance received. The full value of life insurance received is not taxable income. However, the proceeds may be taxable within the estate of the deceased policyholder.
- Child support revenue. Income you receive as child support is not deemed to be taxable income. On the other hand, alimony received is taxable income.
- Home sales gains. Up to $250,000 ($500,000 for married filing jointly) in gains on the sale of a qualified principal residence is not taxable.
- Scholarships/fellowships. Money received to cover tuition, fees, and books for degree candidates is not generally taxable.
- Refunds. Federal refunds (technically you’ve already accounted for this income) and most state refunds for non-itemizers are also tax-free.
This is by no means a complete list of tax-free income, but it’s nice to know that some areas of tax law still benefit taxpayers.