As approaches and schools close for the vacation, many students will seek seasonal jobs to gain work experience and earn some personal income. For business owners with children of working age, employing their kids comes with several appealing benefits. These include the ability to write off their wages as business expenses and establishing tax-free retirement accounts for them early on. This annual migration of young people from classrooms to the workplace is a well-established tradition in the U.S. According to the Bureau of Labor Statistics, a notable 55 percent of individuals aged 16 to 24 were employed during the summer break of 2023. This year is likely to see a similar trend, with over a million youths entering the labor market.
If you own a business and your kids are among those planning to work, a recent CNBC report highlights the numerous benefits this situation can offer both families and companies. Financial and tax experts have provided key reminders for self-employed parents hiring their children. Following specific guidelines, often not thoroughly explained in trending social media videos, is crucial to maximize benefits while staying within legal boundaries.
Firstly, be aware of your state's labor laws regarding the employment of younger individuals. While many states prohibit hiring children under 14, these regulations are evolving as more companies turn to young workers to fill gaps in their workforce. Additionally, ensure that the jobs provided meet legitimate business needs and that family members are compensated reasonably and formally documented alongside regular employees.
Understanding relevant tax rules for younger workers is also beneficial. Given that a summer job usually lasts only two to three months, it is unlikely that a child's income will surpass the 2024 single-filer deductible of $14,600, though it remains subject to income tax withholding. Wages below this taxable threshold can be deducted by the employer-parent as a business expense, benefiting everyone except the Internal Revenue Service (IRS).
Another perk of employing family members is that payments to children under 18 are not subject to Social Security and Medicare taxes, according to the IRS. This can be a significant advantage. Moreover, hiring your teen allows you to open a Roth Individual Retirement Account (IRA) for them—a strategy experts call "triple-tax efficient" to help young people start saving for retirement early.
Roth IRAs are unique as they are funded with after-tax income. If a child's income does not exceed the $14,600 deductible, there is no tax liability. Withdrawals after the qualifying age of 59.5 years are generally tax-free, and early accessed funds are usually also tax-free since they were taxed initially. Parents can contribute up to $7,000 annually to match payments made by their under-18 working children into their Roth IRAs. Financial advisors consulted by CNBC estimate that $500 invested from this summer's work by youth could grow to nearly $10,000 by the time they retire in 50 years, assuming a 6 percent growth rate.
By hiring your child, you provide them with valuable job and business experience, mostly untaxed income that is deductible as a business expense, significant tax advantages from an early retirement account, and the joy of spending the summer answering to Mom and Pop. What’s not to love?