Tax and Money Tip of the Week
Paying Wages to Your Children
August 31, 2011 | No. 58
Parents Employing Their Own Children
Payments for the services of a child under the age of 18, who works for his or her parent in a trade or business, are not subject to Social Security, Medicare, and North Carolina Unemployment taxes, if the trade or business is a sole proprietorship or a partnership in which each partner is a parent of the child.
If these payments are for work, other than in a trade or business, such as domestic work in the parent’s private home, they are not subject to Social Security and Medicare taxes until the child reaches age 21. Payments for the services of a child under age 21 who works for his or her parent, whether or not in a trade or business, are not subject to federal unemployment tax. Depending on the amount of payments for services, they could be subject to federal, state, school and city income tax withholdings.
Paying wages to a child can be an effective income-shifting strategy for a taxpayer who owns a business or income-producing property. Income may be taxed at the child’s lower rate, or escape tax altogether. The child can contribute to a retirement plan. If a child earns enough from the family business during college years, the child may be able to claim an education credit that the parents lose because of AGI limitation. Earned income is not subject to kiddie tax regardless of age.
A child’s wages are deductible by the parent-employer only if:
- the work is done in connection with the parent’s trade of business (or income-producing property),
- the child actually renders the services and
- the payments are actually made.
The payments must be reasonable in relation to the services rendered. Maintain records showing services performed and wages paid.
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Questions or Comments?
Mark Vitek, CPA/PFS, CFP®
…until next week.