If you own a business and have a child in high school or college, hiring him or her for the summer can provide a multitude of benefits, including tax savings. And hiring can make more sense than ever due to changes under the Tax Cuts and Jobs Act (TCJA).<\/p>\n
How it works<\/strong><\/p>\n By shifting some of your business earnings to a child as wages for services performed, you can turn some of your high-taxed income into tax-free or low-taxed income. For your business to deduct the wages as a business expense, the work done must be legitimate and the child\u2019s wages must be reasonable.<\/p>\n Here\u2019s an example: A sole proprietor is in the 37% tax bracket. He hires his 20-year-old daughter, who\u2019s majoring in marketing, to work as a marketing coordinator full-time during the summer. She earns $12,000 and doesn\u2019t have any other earnings.<\/p>\n The father saves $4,440 (37% of $12,000) in income taxes at no tax cost to his daughter, who can use her $12,000 standard deduction (for 2018) to completely shelter her earnings. This is nearly twice as much as would have been sheltered last year, pre-TCJA, when the standard deduction was only $6,350.<\/p>\n The father can save an additional $2,035 in taxes if he keeps his daughter on the payroll as a part-time employee into the fall and pays her an additional $5,500. She can shelter the additional income from tax by making a tax-deductible contribution to her own traditional IRA.<\/p>\n Family taxes will be cut even if an employee-child\u2019s earnings exceed his or her standard deduction and IRA deduction. Why? The unsheltered earnings will be taxed to the child beginning at a rate of 10% instead of being taxed at the parent\u2019s higher rate.<\/p>\n