Dear
Client:
The COVID-19 pandemic may create tax
benefit opportunities for you and your family members.
For example, you could hire your under-age-18
children, pay them, say, $10,000 each, and they could pay zero federal income
taxes. And you or your corporation, the employer, would deduct the $10,000 you
paid to each of the children.
The child wins. You win. There’s more.
Schedule C Business
Let’s say you operate your business as a
sole proprietorship, a single-member LLC that’s treated as a sole
proprietorship for tax purposes, a husband-wife partnership, or an LLC that’s
treated as a husband-wife partnership for tax purposes. Good!
That means you can hire your under-age-18
child, and the child’s wages will be completely exempt from Social Security and
Medicare taxes (FICA tax) and FUTA taxes.
To be clear, the FICA tax exemption applies
to the employee’s share of FICA tax that’s withheld from the employee’s
paychecks and to the employer’s share of FICA tax that your business
must pay over to the Feds. You have to like that!
For 2020, your
under-age-18 employee-child’s standard deduction will
shelter from federal income tax the first $12,400 of wages received if the
child has no taxable income from other sources. No federal income taxes for
this child. You have to like that too!
You can hire the
under-age-18 child part-time, full-time, or whatever
works for you and the child. Right now, children in this age category are
probably not attending school, and the school district’s lengthy summer
vacation may have already begun.
In the fall, will your under-age-18 child
be attending school in person or online? You probably don’t know anything for
sure at this point. But in the COVID-19 era, your under-age-18 child’s
availability to work in your business may be at an all-time high.
The wages received by your child can be
used to help keep the family afloat financially. If the family is not so
financially stressed, your child can use some or all of the wages to fund a
college savings account or make a Roth IRA contribution.
What
if My Business Is Incorporated?
If you operate your
business as an S or a C corporation, your child’s wages received from the
business are subject to FICA and FUTA taxes, just like any other employee, regardless
of the child’s age.
What if I Hire a Family Member over Age
21?
Do it! The wages received from your
business are subject to FICA and FUTA taxes, just like any other employee. This
is the case whether you operate your business as an unincorporated sole
proprietorship, a partnership, or an LLC or as an S or a C corporation.
Tax
Advantages for Your Business
When you hire a child or other family
member, your business deducts the wages paid.
- If you
operate the business as a sole proprietorship, a single-member LLC that’s
treated as a sole proprietorship for tax purposes, a husband-wife
partnership, an LLC that’s treated as a husband-wife partnership for tax
purposes, or an S corporation, the wage expense deduction reduces (a) your
individual federal taxable income, (b) your individual net self-employment
income, and (c) your individual state taxable income (if applicable).
- If you operate the business as a C corporation, the corporation
deducts the wages paid to a child or other family member. The deductions
reduce the corporation’s federal taxable income and probably the
corporation’s state taxable income (if applicable).
- If your business will be unprofitable
this year due to the COVID-19 fallout, deductions for wages paid to a
child or other family member can create or increase a net operating loss
(NOL) for 2020. If so, you can carry back the 2020 NOL for up to five tax
years—back to 2015. The NOL carryback can trigger a refund of income taxes
paid for the carryback year. That can really help. An NOL carried back to
a pre-2018 tax year can be especially helpful, because tax rates were
generally higher in those days.
Keep payroll records just like you would
for any other employee to document hours worked and duties performed (e.g.,
timesheets and job descriptions).
Issue W-2s just like you would for any
other employee.
If you would like to discuss the tax and
financial benefits of hiring family members, please don’t hesitate to call me
on my direct line at +1 425-395-4318.
Sincerely,
Anil Grandhi.
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