Q Dear Rick:
I have a couple questions that I hope you can help me with. I am in business by myself as a self-employed plumber. My 16-year-old daughter has recently expressed an interest in doing some part-time work for me. My first question: is there any problem about hiring my daughter? Since I never have had an employee I am curious if there is anything I should know such as withholding for taxes and those types of things. I do want to make sure that I don’t run into any problems. You should know that I plan to pay her about $9 an hour and anticipate that I will pay her somewhere between $4,000 and $5,000 from now through the rest of the year. Also, you can tell me if there’s anything else that I should know.
A Dear Tim:
I think it is great that your daughter has shown an interest in working. I’ve always been a believer that it is important for people to work at a young age. Work teaches life skills that cannot be taught in the classroom. Therefore, congratulations to your daughter for wanting to enter the workforce.
From a legal and tax standpoint, there is absolutely no problem in your hiring your daughter. In fact, there are some benefits from a tax standpoint when you do hire your daughter.
One of the benefits of hiring a child is that you’re exempt from a variety of taxes. Typically, when you hire an employee, you have to withhold taxes, including Social Security. In addition, as the employer, you have to match their Social Security and also pay a variety of employment taxes. That is not the case when you hire a child. As long as your child makes less than $6,300 you do not have to pay unemployment or Social Security tax. In addition, your business can deduct the amount of wages you’re paying your daughter and at the same time, because of her standard deduction, more likely than not there will be no tax liability that she will incur. Therefore, it is a win/win for both your daughter and you.
There is also another benefit that you should definitely take advantage of. Because your daughter will have earned income, it means she is eligible for a Roth IRA. Many people are under the false belief that you have to be over 18 years of age to do a Roth; that is not the case. There are no age limits when it comes to IRAs. The only requirement is that someone has earned income. Therefore, you definitely should be encouraging your daughter to open up a Roth IRA and invest money for her future.
I recognize that it is a tough sell to have a 16 year-old put money away for their retirement. Therefore, something you may want to do is offer an incentive. For example, you can set up a matching program. For every dollar she puts in you’ll match it. The bottom line is this is a wonderful opportunity to be able to invest money long term on a tax-free basis.
The maximum your daughter can put into an IRA is the amount of her earning or $5,500, whichever is less. Therefore, if your daughter earned $5,000 this year she is eligible to put the entire $5,000 into a Roth IRA.
I also believe there is another benefit that you should take advantage of and that is an opportunity to teach your daughter about the basics and the benefits of investing. Learning the basics and benefits of investing is invaluable to your daughter. If she can learn the importance of investing on a regular basis she will be head and shoulders above her peers.
One last note for parents who are self-employed and hire their children; there are some great benefits. However, like everything else in the law there are some caveats. If your business is set up as a corporation, your children’s wages are unfortunately, subject to Social Security, Medicare and federal unemployment taxes. In other words, they’re treated just like any other employee. In order to avoid those taxes, your business has to be set up either as a sole proprietorship (which means you are filing a Schedule C) or you can be a Limited Liability Company, as long as it is a single member limited liability company or a husband and wife limited liability company.
Rick is a fee-only financial advisor. His website is www.bloomassetmanagement.com. If you would like Rick to respond to your questions, please email Rick at firstname.lastname@example.org