The Tax Blotter: June 4, 2019

With the summer coming up soon, your small business clients may arrange to have their teenaged kids work for the firm instead of lounging around the pool. This can provide ta advantages for bot the family and the business.

Seek a tax exemption.

Typically, a teenager will have little or no tax liability on their summer earnings. If your child didn’t owe any tax for 2018 and doesn’t expect to have a tax liability for 2019, he or she can be exempted from withholding. All the child has to do is write “Exempt” on Line 7 of the Form W-4 that is filed with your business. But a dependent child won’t qualify if he or she will have more than $3,500 in investment income and over$1,100 in total income.

Reduce payroll taxes.

Believe it or not, hiring your child for the summer can actually lower your firm’s payroll tax bill. If your business isn’t incorporated—for example, you’re a self-employed sole proprietor— no FICA tax is due on wages of a child under age 18. This may also apply to a single-person limited liability company (LLC). Similarly, wages of a child under age 21 are exempt from FUTA if your business is unincorporated.

Encourage retirement savings.

It may be hard to convince your youngster to start saving for retirement. Nevertheless, your child can contribute earnings to a Roth IRA to secure tax-exempt payouts in the future. Alternatively, the child may contribute to a traditional IRA and claim a deduction, when it makes sense. In either event, you can take the sting out of the situation: Match the child’s earnings with a gift of cash. In this way, your child can still splurge on a new high-tech gadget.