Payroll
2025-03-10 17:21

We operate a family grocery store, and our 12-year-old helps us. Can we pay him a salary, how should we formalize it, and are there tax implications?

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:

  • 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.
PAYROLL