Say your small business client needs extra help during the summer and the entrepreneur’s teenaged child is searching for a job while school is out. The obvious solution? Hire the child.
Not only can this arrangement be mutually beneficial, it may provide tax breaks for both the child and the business owner.
For starters, the wages your child earns are taxable to him or her, just like they are for any other employee. However, the income can be sheltered from federal income tax by the standard deduction.
Under the new Tax Cuts and Jobs Act (TCJA), the standard deduction for a single filer in 2018 is $12,000 – way above the amount most children will earn from a summer job. Also, consider that you may be earning less money as a result of paying your child to work in the summer, but you’re saving tax at the same time.
For instance, if you expect to be in the 24% tax bracket in 2018 and you pay your child $6,000 for the summer, you can save $1,440 (24% of $6,000), not to mention state tax savings.
A logical question: What about the “kiddie tax?” This tax generally applies to a dependent child under age 24 if unearned income exceeds in 2018 exceeds a $2,100 threshold.