Short Answer: Yes, you can pay your child a salary; certain tax exemptions apply.
Full Answer: As a family-owned business that is not incorporated, you can pay your 12-year-old child a salary for helping in the store, and there are several tax benefits:
Federal Income Tax:
Social Security and Medicare Taxes (FICA):
Federal Unemployment Tax (FUTA):
How to Formalize It:
Retirement Contributions:
State Taxes: Check state-specific regulations, as some states may have different rules for child employment in family businesses.
General Federal Standard: The IRS allows tax exemptions for wages paid to children under 26 CFR § 31.3121(b)(3)-1 for FICA and 26 CFR § 31.3306(c)(5)-1 for FUTA.
Full Answer: As a family-owned business that is not incorporated, you can pay your 12-year-old child a salary for helping in the store, and there are several tax benefits:
Federal Income Tax:
- Wages paid to your child are tax-deductible for the business as a business expense if the pay is reasonable for the work done.
- Your child can use the Standard Deduction (up to $13,850 for 2024) to shelter earned income from federal income tax.
Social Security and Medicare Taxes (FICA):
- Exempt from Social Security and Medicare taxes if your business is a sole proprietorship or a partnership where both parents are partners. This exemption does not apply if your business is incorporated (S-corp, C-corp) or an LLC taxed as a corporation.
Federal Unemployment Tax (FUTA):
- Exempt from FUTA until the child reaches 21 years old if the business is unincorporated.
How to Formalize It:
- Set a reasonable wage: Pay a rate consistent with what you would pay a non-family employee for similar tasks.
- Maintain records:
- Use a timesheet to track hours worked.
- Prepare payroll records documenting wages paid and tasks performed.
- Issue a W-2 form at year-end, even if no federal income tax is withheld.
- Open a bank account: Pay the wages directly to your child’s bank account to substantiate the income.
- File employment tax forms:
- Form 941 (Quarterly Federal Tax Return) if applicable.
- Form 944 if you qualify for annual filing.
Retirement Contributions:
- Wages earned by your child are eligible for contributions to a Roth IRA, providing a great opportunity for tax-free growth.
State Taxes: Check state-specific regulations, as some states may have different rules for child employment in family businesses.
General Federal Standard: The IRS allows tax exemptions for wages paid to children under 26 CFR § 31.3121(b)(3)-1 for FICA and 26 CFR § 31.3306(c)(5)-1 for FUTA.