There is a certain allure that family-owned businesses have in this country – “mom-and-pop” stores are still an important part of the local, state, and national companies. One of the defining features of these Main Street businesses is the fact that family members, often across several generations, often keep these small businesses running. Recent changes to the federal tax code (the Tax Cuts and Jobs Act of 2017) acknowledge this, allowing business owners who employ their minor children to take advantage of numerous tax benefits. Below, we will explain some of these benefits.
Qualifications of Your Minor Children
To be eligible for the tax-saving benefits, there are a few requirements you must satisfy:
- Your minor children must perform work that is ordinary and necessary to the business (does not have to be indispensable)
- The work your children perform must be above and beyond normal chores
- You must pay your minor children a rate that is reasonable, comparable to how you would compensate a stranger
- You must be in compliance with all other legal requirements, which means you must file Form W-4, Form I-9 (verifying eligibility to work in the U.S.), Form W-2, and other documents
Tax Benefits
One of the changes the TCJA of 2017 made was to substantially increase the standard deduction to $12,000 per person. This reduced the tax liability for many minor children who work at their parents’ companies to zero. With the raising of this standard deduction, minor children who make more than $20,000 still have minimal taxes to pay. This has allowed business-owner parents to shift a more significant portion of their personal income to their children, realizing great amounts of tax savings.
Another benefit comes with payroll taxes. If your business is structured the right way, you will likely not have to withhold FICA taxes on the wages for your minor children employees. Additionally, you may not have to pay federal unemployment taxes (FUTA) on their wages until they reach the age of 21. Remember, you can usually deduct your children’s salaries as a business expense.
Conclusion
Because there are large amounts of tax savings available for family businesses, the IRS will carefully scrutinize your returns if you take advantage of these benefits. It is well worth it to consult with a financial professional such as Attorney Tyler Q. Dahl, who is also a Certified Tax Coach—one of only 100 attorneys nationwide who enjoy this distinction.
We look forward to speaking with you about strategies to reduce your tax burden as much as possible while protecting your assets for the next generation. Call the firm at 916-545-2790 to discuss your options today.
Dahl Law Group
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