Your child, in many cases, can work for your business without you having to pay the same amount of taxes as on an adult. The amount of money your business can retain depends on your child's age, and may be limited by your business' organizational structure.
Child Under 18
When paying your child who is under 18 years old in return for work done in your business, you will not have to deduct from their payment or contribute from the business any Social Security and Medicare taxes. Additionally, your business does not have to pay Federal Unemployment Tax Act (FUTA) tax. Your business must be a sole proprietorship, however, or a partnership in which each partner of the business is a parent of the child.
Child Under 21
If you are paying your child who is between 18 and 21 years old in return for work done in your business, you have to deduct Social Security and Medicare taxes from their payment as if they were any other employee, and your business must contribute the normal employer's share of these two taxes. However, your business still is not responsible to pay the FUTA tax until after your child turns 22 years old.
Businesses That Don't Qualify
You have to deduct the normal required taxes from your child's payment and pay the employer's share of taxes if your business is one of the following business entities: a corporation, even if owned or controlled by one or both of the child's parents; a partnership, if only one of the child's parents is a partner (if the other is living); or an estate, even if it is the estate of a deceased parent.
Tax That Must Be Withheld
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Regardless of the age of your child, all wages paid to him is subject to income tax withholding. This is not costing your business anything as it comes out of your child's pay. If your child had wages over $3,050 (or under $3,050 and qualifies for a tax return), he must file an income tax return with the IRS.
Thomas Springer, Attorney-At-Law, holds a bachelor's degree in finance and a juris doctorate. He has advised small and medium sized businesses in such fields as wineries, investment groups, syndicates, manufacturers and the hospitality industry. Springer often teaches at the university level internationally and conducts seminars on best business practices.