What is creating exempt family employment?
If you own a family business, you can create exempt family employment to reduce the Social Security payroll taxes that your business incurs. You create exempt family employment by hiring your child who is under age 18, because the earnings of a child under 18 who is employed by a parent who owns a sole proprietorship are not subject to Social Security payroll taxes.
How does it work?
A child who is employed by a parent doesn’t have to pay Social Security payroll taxes under two conditions
- The child must be under 18
- The parent’s business must be organized as a sole proprietorship or a partnership
Tip: If the business is organized as a partnership, the parents must be the only partners.
Both the parent and the child save money
The child’s earnings are exempt from Social Security payroll taxes, so the child saves 7.65 percent of his or her salary. The parent also saves the employer’s share of Social Security taxes (7.65 percent of the salary) that he or she would have normally paid.
Strengths
Simple way to save payroll taxes
Hiring a child under 18 is no harder than hiring any other employee. However, if you do want to hire your child, you should check your state’s child labor laws.
Tradeoffs
The child’s employment status might be considered invalid by the Internal Revenue Service (IRS) or the Social Security Administration (SSA)
If you hire a child under 18 to work in your business, you must pay the child a wage that is appropriate for the actual work done by the child in an age-appropriate job. Otherwise, the SSA or the IRS may argue that the child isn’t really your employee.
Tax considerations
- The cost of labor is a valid business expense deduction that can reduce your tax liability. For more information see IRS Publication 535, Business Expenses.
- A child may have to pay income tax on his or her earnings over a certain amount. For more information see IRS Publication 929, Tax Rules for Children and Dependents.
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Broadridge Investor Communication Solutions, Inc. prepared this material for use by Social Security Benefit Planners, LLC.
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