I have a business client who has been paying allowances to his kids in exchange for their work during the summer time for years. The business client thought it would have been incurred more tax (payroll tax and income tax) if he had put them on payroll. Is he correct?
The answer is NO. He understood how to take the benefits after I walked him through the tax planning.
The proper tax planning in this case is to hire the kids as regular part-time employees. In other words, they should be paid through payroll. You may argue that the payroll taxes (such as unemployment tax, social security and medicare) would cost a lot to the kids as well as the company. The good news is No! Since the payroll taxes for family employees, who are under 18 years old, are exempt if you run your business under sole proprietorship, single-member LLC or LLC owned by husband and wife, no payroll taxes are due.
You don’t only get the tax break from the payroll tax saving. You will enjoy the income tax benefit as well. Although the kids need to report their W-2 income, they do not owe any income tax if the income is less than $6,300 when they take the standard deduction in their returns. On the contrary, the payroll you paid is tax deductible in your business tax return.
As long as your kids really work for your business, and your company did pay them through W-2, the above tax planning can easily save you tax of $2,000 per kid who works for your business annually. Certainly, you need to document this family employment carefully. Please do not hesitate to contact us if you want to learn more about it.
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