Sole proprietors or husband-wife partnerships can pay their children under age 18 for services in the business without Social Security or self-employment tax. This makes paying the child beneficial whenever the parents income tax bracket is greater than the childs bracket.
Specific Details
A parent owns a sole-proprietorship business. The parent decides to hire a 15-year-old child to clean the business premises. The child was paid a reasonable wage of $4,000 per year and encouraged to save the earnings for future college costs. Since the parent was in a combined 41% tax bracket (federal 35% + state 6%), the $4,000 in wages saved $1,640 (41% x $4,000). Since the childs taxable income would be zero ($4,000 wages – $12,000 standard deduction), there would be no tax on the wages. Therefore, the total family tax savings would be $1,640 per year.
Potential Savings
If you operate your business as a sole-proprietorship you can pay your children that are under age 18 without incurring payroll taxes.