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Payroll and income taxes: Hiring your kids for a summer job

On Behalf of | Jul 8, 2016 | Tax Law

Summer jobs are a great way to generate income for college and a substantial learning experience for high school and college students. The Bureau of Labor Statistics says that last July, more than 20 million people between the ages of 16 and 24 were employed. Sole proprietors, and married couples who run a family business as the only partners of the entity, frequently hire their own children during the summer (and often year-round) to keep income in the family.

Income Tax Considerations

It is important for parents throughout the Toledo area to understand the nuances of tax law when hiring their own children, especially when claiming the kids as dependents. As a recent article in Accounting Today points out, parents may continue to claim working teens under the age of 19 (as well as full-time students up to the age of 24) as dependents as long as the parents are providing at least half of the total support for the children. A child will be required to file a personal tax return if he or she earns $400 or more in any given year.

The Child’s Wages May Be Characterized As Allowable Business Expenses

For sole proprietors and partnerships where parents are the only owners there can be tax benefits to hiring the kids. For children under the age of 18, in these situations, wages are not subject to Federal Unemployment Taxes (FUTA) or Medicare taxes. If the child is hired and treated as a regular employee, earning regular wages and a W-2 is filed, you can treat the wages as a business expense. For children between the ages of 18 and 21, Medicare taxes are required, but continue to exempt from FUTA.

Payments should be made as actual wages. It is a good practice to pay by check and have the child deposit the income into his or her own bank account to keep a complete paper record.