The COVID-19 pandemic may create tax benefit opportunities for you and your family members.

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 da
    ys.

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
408-778-9651.

 

 

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