Download - Hiring Children In The Family Business
Hiring Children in the Family Business
David W. Swatosh, CPAPhone: Ext. 7147
Email: [email protected]
Agenda
• Considerations• Income Shifting • Kiddie Tax Implications• Retirement Savings• Education Credits• Payroll Tax Savings
Considerations
• Pay must be reasonable• Perform work necessary for the business• Pay by check (same as other employees)• File W-2’s and include on payroll tax forms• Follow the Fair Labor Standards Act
Income Shifting
• Shift income from higher (35%) tax bracket to lower tax bracket
• $5,700 (2010) Standard Deduction (Rev. Proc. 2009-50)
• No Exemption Allowed
Example
• Facts: Mom owns S Corp and is in the 33% tax bracket. Son is home from college and works part time earning $6,000.
• What are the tax implications?
Income ShiftingParents:
Child’s Wages $6,000
Tax Rate 33%
Tax Savings $1,980
Child:
Child’s Wages $6,000
Stand. Deduction ($5,700)
Taxable Income $300
Tax Rate 10%
Tax Due $30
• By shifting $6,000 of income the family saved $1,950 in taxes
Kiddie Tax Implications
• Unearned income (greater than $1,900) taxed at the parents tax rates (Sec. 1(g))
• Age Test
• Support Test
Example
• Facts: Mom owns S Corp and is in the 33% tax bracket. Son is home from college and works full time earning $10,000 (more than half of his support) and has dividend income of $3,500.
• What are the tax implications?
Kiddie Tax ImplicationsParents:
Child’s Wages $10,000
Loss of Exemption ($3,650)
Inc. subject to Kiddie Tax $1,600
Total Inc. from Child $7,950
Tax Rate 33%
Tax Savings $2,624
Child:
Child’s AGI $13,500
Exemption ($3,650)
Stand. Deduction ($5,700)
Taxable Income $4,150
Tax Rate 10%
Tax Due $415
• By shifting $10,000 of income and avoiding the Kiddie tax the family saved $2,209 in taxes
Retirement Savings
• Traditional IRA contributions up to $5,000 for 2010 (Sec. 219)
• Tax is deferred until distributed
• Phase-out for single starts at $56,000
Example
• Facts: Mom owns S Corp and is in the 33% tax bracket. Son is home from college and works full time earning $10,000 (more than half of his support) and has dividend income of $3,500. Son also contributes $5,000 to a traditional IRA.
• What are the tax implications
IRA ContributionParents:
Child’s Wages $10,000
Loss of Exemption ($3,650)
Inc. subject to Kiddie Tax $1,600
Total Inc. from Child $7,950
Tax Rate 33%
Tax Savings $2,624
Child:
Child’s AGI $13,500
Exemption ($3,650)
IRA Deduction ($5,000)
Stand. Deduction ($4,850)
Taxable Income $0
Tax Rate 10%
Tax Due $0
• By shifting $10,000 of income, contributing $5,000 to a traditional IRA and avoiding the Kiddie tax the family saved $2,624 in taxes (however may want to consider Roth IRA)
Education Credits (Sec. 25A)
• Hope Scholarship Credit
• Lifetime Learning Credit
• NEW: American Opportunity Credit
• Parents can forgo the dependency exemption for the child (Treas. Reg. Sec. 1.25A-1(f)(2)
Example
• Facts: Mom owns S Corp and is in the 33% tax bracket and is disqualified from claiming education credits. Son works full time and earns $10,000 while home from college (more than half of his support) and had $4,000 in qualifying tuition expenses.
• What are the tax implications?
Education CreditsParents:
Child’s Wages $10,000
Loss of Exemption ($3,650)
Net effect on T.I. $6,350
Tax Rate 33%
Tax Savings $2,096
Child:
Child’s Wages $10,000
ExemptionStand. Deduction
($3,650) ($5,700)
Taxable Income $650
Tax Rate 10%
Tax Due $65
AOTC $1,065
Tax Refund $1,000
• By shifting $10,000 of income the family saved $3,096 in taxes
Payroll Tax Savings
• Child’s earnings could be exempt from FICA and FUTA
• Child must be under age 18 (FICA) or 21 (FUTA)
• Unincorporated businesses or husband and wife partnerships
Circular 230PleasePlease Note: This document is intended for internal training Note: This document is intended for internal training
purposes onlypurposes only
NOTICE TO PERSONS SUBJECT TO UNITED STATES NOTICE TO PERSONS SUBJECT TO UNITED STATES TAXATION: DISCLOSURE UNDER TREASURY CIRCULAR 230TAXATION: DISCLOSURE UNDER TREASURY CIRCULAR 230
The United States Federal tax advice, if any, contained in this The United States Federal tax advice, if any, contained in this document and its attachments may not be used or referred to in document and its attachments may not be used or referred to in the promoting, marketing, or recommending of any entity, the promoting, marketing, or recommending of any entity, investment plan, or arrangement, nor is such advice intended or investment plan, or arrangement, nor is such advice intended or written to be used, and may not be used, by a taxpayer for the written to be used, and may not be used, by a taxpayer for the purposes of avoiding Federal tax penalties.purposes of avoiding Federal tax penalties.