Tax Tip Series: Tax Advantages to Employing Your Children

Children under the age of 18 who are employed by their parents are exempt from FICA tax (Social Security and Medicare) on their wages. It is important to note “employed by their parents” means that their parent(s) have a sole proprietorship, single-member LLC or a partnership in which only the parents are members. Small businesses that are incorporated entities or any entity that includes a non-parent member do not meet the exemption. Additionally, children under the age of 21 who are employed by a sole proprietor parent are also exempt from FUTA (Federal unemployment tax).

By employing your children, you are can shelter some income. A child, who is paid by the business and receives a W-2, is entitled to his own standard deduction of $5,950 in 2012. Thus the first $5,950 paid to the child is tax free. The next little bit of their earned income is likely taxed at the lowest tax bracket, Therefore, if the parents are in a higher bracket, this should save some money for everyone.

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