Working at a tender age is an American tradition. Here’s what you need to know about paying your kids properly.
Question
Here’s a question I received from one of my clients: “I will hire my 15-year-old daughter to work in my single-member LLC business, and I expect to pay her about $12,000 this year. Do I pay her through payroll checks and file a W-2?”
My Answer
Yes. And W-2 payment is essential. If you pay her on a 1099, she will pay self-employment taxes.
When you pay her on a W-2, neither you nor your daughter pays any Social Security or Medicare taxes, and in most states, you also don’t pay any unemployment taxes.
Key point 1. Your single-member LLC is a “disregarded entity” for federal tax purposes. It’s taxed as a sole proprietorship (unless you elect corporate treatment). In this instance, you are the child’s parent, enabling “no Social Security or Medicare taxes” for both your child and your proprietorship.
Key point 2. Your daughter has a $12,950 standard deduction. This means she also pays zero tax on earned income up to that amount.
Unexpected “BONUS”
Earned income allows your child to contribute to Roth IRA. Even Modest Contributions to Child’s Roth IRA Can Amount to Big Bucks by Retirement Age. By making Roth contributions for a few years during the teenage years, your kid can potentially accumulate quite a bit of money by retirement age.
But realistically, most kids won’t be willing to contribute the $6,000 annual maximum even when they have enough earnings to do so.
Say the child contributes $2,500 at the end of each year for four years. Assuming a 5 percent annual rate of return, the Roth account would be worth about $82,000 in 45 years. Assuming a more optimistic 8 percent return, the account value jumps to a whopping $259,000. Wow!
In conclusion,
You get the idea. If you hire your kid, makes sure you pay them W-2 wages and file proper paperwork with the IRS. With relatively modest annual contributions for just a few years, Roth IRAs can be worth eye-popping amounts by the time your “kid” approaches retirement age.
We specialize in helping clients clarify their taxes so they keep more of their money. Letting your kids’ Roth IRA account grow tax free is what we call tax planning.
If you or someone you know would like to learn about Roth IRA and backdoor Roth, please feel free to contact us by scheduling a call, or by emailing at [email protected].
Tatsiana B. Bender
Bender CPA, PLLC
Fort Worth, TX 76107
[email protected]
Phone: (817) 313-4352
Bender-CPA.com
