Thinking of introducing the next generation to the family business early, maybe through a summer job?
Enterprising parents can find some encouragement waiting in federal tax codes, of all places. While their children do pay income taxes on earnings, they often need not pay Social Security (FICA), Medicare or federal unemployment taxes (FUTA) through most of their teens – under the right circumstances.
Yes, there are a couple of conditions necessary to qualify your children for those exemptions:
o Type of business – The family enterprise must be a sole proprietorship operated by a parent or a partnership of parents with no other partners, including other family members or non-parent spouses. Corporations and estates also do not qualify, even if they are operated entirely by the parents, according to the Internal Revenue Service.
o Ages of the employees – The children are exempt from Social Security and Medicare taxes until age 18; they are exempt from federal unemployment taxes until age 21.
Standard withholding for income tax on the child’s wages still applies.
Why might a small family business be interested in the exemptions for children? For one thing, if his/her child is not liable to those payroll taxes, the parent doesn’t have to pay the standard employer’s portions of them, either. Another advantage is that a sole proprietor can lower his or her own income – and tax – by paying his son or daughter for their work. CPA firm Riley & Associates PC of Newburyport, Mass., points out these and some other more complex advantages online at http://cpa-services.com/special_hir.shtml.
For the IRS’s take on family workers – including employing spouses and parents – see Publication 15 under “Family employees.”
We at EricJohn Ltd. also can guide parents through the intricacies of employment taxes.
Maybe this is the year your child can jump into the family business for learning and profit!