Summer can bring new energy and opportunities for your small business, and hiring teens or interns for seasonal support can be a smart move. Whether you need help with administrative tasks, a special project, or a surge in customer activity, bringing on young talent requires understanding specific tax responsibilities.
At Lightening the Load, we’re here to guide small business owners through all aspects of employment tax. This blog post will break down the essential tax knowledge for businesses considering summer youth employment.
Rob’s weekly tax tip – Paying your children through your business
“Hiring one of your own teenage children can be a great way to save on taxes while teaching them the responsibility of having an allowance – keep reading to learn how this works!
If you need an extra set of hands for some summer projects or just need someone to keep up with basic tasks in the business, hiring one of your kids – whether high school or college – can be a very tax efficient way to move income within the family.
If you pay your son or daughter $15,000 or less, all of their income gets wiped out by the standard deduction. You don’t need to show any actual expenses to claim this deduction on their tax return since everyone automatically receives it. Now, you have just removed $15,000 of taxable income, per employee-child, from your business and your tax return – likely at a much higher tax rate than your kids.
Further, the kids now have earned income which means they can contribute up to $7,000 per year to a Roth IRA. Earnings withdrawn from a Roth IRA in retirement are completely tax free. Also, earnings can be withdrawn tax free up to $10,000 for a 1st time home purchase if the child has opened the account for at least 5 years. They can also withdraw from the Roth IRA to pay for college expenses – you have options!
For example, you hire your 16-year-old son to help you run your remodeling company, paying him $7,000 per year, so he can max out his yearly Roth IRA contribution. He works for you all through high school and college during the summer. Assuming they can earn around 6.5% per year on the contributions, they will have about $50,000 saved in the Roth IRA when they graduate from college. Since they’ve had the account for more than 5 years, they can use $50,000* as a down payment on a house – right after they graduate from college!”
— Rob Burgess, CPA
*The $50,000 consists of $8,000 earnings and $42,000 principal. Earnings are subject to the $10,000 limit; principal investment can always be withdrawn tax free.
Employee vs. Independent Contractor: A Crucial Tax Classification
Before extending an offer, accurately classifying your summer help is paramount. The IRS has specific rules to determine if someone is an employee or an independent contractor for tax purposes, primarily focusing on the level of control your business has over the work performed.
- Employee: If your business dictates what tasks are done, how they are executed, and where the workers are to report on a daily basis, the individual is likely an employee. This classification generally triggers payroll tax obligations for your business.
- Independent Contractor: If your business only controls the result of the work, and the individual controls how they achieve that result, they might be an independent contractor. Your tax responsibilities are significantly different in this scenario (e.g., issuing Form 1099-NEC if payments meet the threshold of $600).
Understanding Payroll Tax Responsibilities for Employees
If the teen or intern is classified as an employee, your business, as the employer, will have specific payroll tax obligations:
- Social Security and Medicare Taxes (FICA): Your business is generally responsible for withholding a portion of these taxes from the employee’s wages and paying a matching employer portion.
- Federal Unemployment Tax (FUTA): Your business may also need to pay federal unemployment tax, which contributes to state unemployment compensation funds. This is solely an employer-paid tax.
- State Unemployment Tax (SUTA): Most states also have their own unemployment tax, which businesses must pay.
Important Tax Forms to Handle for Employees
When hiring an employee, several tax forms are essential for your business:
- Form W-4, Employee’s Withholding Certificate: The employee completes this form to inform your business how much federal income tax to withhold from their pay.
- Form I-9, Employment Eligibility Verification: This form verifies the employee’s identity and eligibility to work in the U.S. (Crucial for all new hires, though not a tax form itself).
- Form W-2, Wage and Tax Statement: At the end of the year, your business must provide each employee with a Form W-2, reporting their total wages and taxes withheld. A copy is also sent to the Social Security Administration.
Special Tax Considerations When Hiring Minors
While general payroll tax rules apply to minors, there are specific exemptions that can affect your business’s tax liability:
- Exemptions from FICA Taxes: If your business is a sole proprietorship or a partnership where each partner is a parent, and you hire your own child under age 18, their wages may be exempt from Social Security and Medicare taxes.
- Federal Unemployment Tax (FUTA) Exemption: Wages paid to your child under age 21 for services performed in your business (again, if it’s a sole proprietorship or partnership where each partner is a parent) are exempt from FUTA.
- State Unemployment Tax: State unemployment tax exemptions for hiring minors (especially family members) vary, so it’s important to check your specific state’s rules.
- Income Tax Withholding: Generally, federal income tax must still be withheld from a minor’s wages based on their Form W-4.
Maintaining Accurate Records is Key
Proper record-keeping is vital for tax compliance. Your business should keep detailed records of:
- Employee wages paid
- Dates of employment
- Hours worked
- All taxes withheld and paid
- Completed Forms W-4 and I-9
These records are crucial for accurate tax reporting, verifying deductions, and in case of any review by tax authorities.
Streamline Your Summer Hiring Tax Tasks
Hiring teens or interns can be a great asset to your small business. Understanding and fulfilling your tax responsibilities as an employer from the outset is key to a smooth and compliant summer.
At Lightening the Load, we’re your steadfast partners, accompanying you through every tax season and helping you navigate complex tax matters. Let us help your business understand and manage the tax impact of your summer hiring.
Let us lighten your load.
