The holiday season arrives with twinkling lights, festive cheer, and, for many family-run businesses, an avalanche of extra work. To keep spirits high and the workload manageable, some families turn inwards, tapping into a readily available resource: their children and spouses. But before you hand out Santa hats and aprons, there are some key tax considerations to ensure a smooth financial ride.
Hiring Your Child: A Tax-Friendly Boon
Tax reform has ushered in good news for young earners. Children under 19 (or students under 24 without investment income) who are claimed as dependents can earn up to $12,950 in 2023 without facing any tax liability. Beyond that, the next $10,275 is taxed at a mere 10%. This presents a golden opportunity for family businesses. Consider this:
- Reduce Your Tax Bill: Paying your child a reasonable salary reduces your business income and, consequently, your tax burden. For instance, if you’re in the 22% tax bracket and pay your 17-year-old $14,000 in 2023, you can save $3,080 in income tax alone!
- Bonus Benefits: If your business is unincorporated and your child is under 18, their wages are exempt from FICA taxes (Social Security and Medicare), further reducing your expenses.
- Retirement Planning: Encourage your child to invest in a traditional IRA with their earnings. With a $6,000 contribution limit for 2023, they can potentially save even more on taxes.
Spouse on Board: Employee or Partner?
For spouses working together, understanding their roles determines the tax implications. If one spouse has clear control and direction over the other, the working spouse becomes an employee subject to income tax and FICA withholding.
However, if both spouses share power, contribute capital, and actively participate in the business, a partnership is formed. In this case, you’ll report income on Form 1065 or, if you file a joint return, consider a qualified joint venture. This allows you to split income and benefits equally, giving each spouse credit for Social Security earnings.
Remember These Key Points:
- The “kiddie tax” applies to unearned income (interest, dividends) of children under 19 or students under 24. It may subject their income to your tax rate.
- If your spouse is an employee, you must handle W-2s and tax withholdings like any other employer.
- State and local taxes may have additional requirements for employing family members.
Navigating the Tax Maze
While this article provides a helpful overview, seeking professional guidance from a tax advisor is crucial to ensure you’re maximizing benefits and minimizing risks. They can help you navigate specific rules and regulations based on your unique family business situation.
So, this holiday season, consider leveraging the support of your closest allies. With mindful planning and a bit of tax savvy, employing your child or spouse can not only ease your workload but also bring financial advantages to your family business. And who knows, maybe these early lessons in entrepreneurship will spark a lifelong passion for the family legacy!
