Besides on-the-job training for your kids and keeping a close eye on them after school, there can be some financial advantages to hiring your children to work in your practice.
First, your child-employee under age 21 is exempt from Federal Unemployment (FUTA) tax.
If you are a sole proprietor or a single member LLC, your child-employee is exempt from FICA/Medicare taxes if they are under 18 years old. On $5,000 of gross wages, this is almost $400 in payroll taxes that you don’t have to pay. If you are a corporation, your kids are subject to Fica/Medicare taxes, but hiring them can be a good way to reduce your taxable income while pushing money into their savings.
If your child is a dependent, they can earn up to the standard deduction amount before needing to pay income tax ($6,300 in 2016). Does your child have an IRA? They can also earn the maximum contribution amount as wages ($5,500 in 2016) which is a deduction to your business and deductible on their individual tax return as well. That’s $11,800 in income tax free wages to your child, and fully deductible by your business.
Hiring your child is not without obstacles, however. Make sure that the tasks your child performs are legitimate needs of the business. Document the hiring process and have all the necessary forms in order. And, check that the wages are appropriate. If your child is hired to clean instruments and take out the trash, that is not a $30/hour job. At $12/hour, that’s almost 1,000 hours to earn the $11,800 outlined above. That’s a serious part-time job, a solid 20 hours per week all year long, so make sure that school and sports and other activities aren’t competing for this time as well.
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