Your Teens and Money - A "Bit" of Horse Sense - TN Hours & Earnings Guidelines
My daughter, Sarah, wanted to purchase a horse of her own. As a parent, I wanted to encourage her to pursue this in a responsible way. She decided to teach horseback riding lessons as a way to earn money. Horses were a favorite pastime of hers and it made sense for her to do what she loved.
Do your kids have a dream they’re chasing? Are you encouraging them to learn financial responsibility? When you hire your own kids to work in the family business, you are saving your company money, getting a bit of a tax break, and you are teaching your children valuable lessons. So go hire your kids! We do!
Did you know that you can deposit their earnings into a Section 529 college plan or a Roth IRA to help them save for college? Business owners’ children of any age can work any number of hours or time of day. However, those who are under 16 cannot do hazardous work (e.g., work with lawn mowers, sewing machines, deep fryers, work near flammable or hazardous materials).
What age is too young to put on the payroll of a family owned business? The IRS has accepted that a seven-year-old child (yes that's right 7 yesrs old!) may be an employee but probably won’t believe that children younger than seven are performing any useful work for your business.
If your teen is a budding entrepreneur and starting their own business, keep in mind that whether it's babysitting or mowing lawns, they may still be responsible for paying taxes on the money they make. Generally the IRS requires teens who earn more than $400 from self-employment to file a tax return. If they have any expenses to deduct, such as mileage or equipment, they'll also need to file a Schedule C. for 2015.
If the only employees are immediate family, owners’ children need not be paid the minimum wage—but if others are regularly employed in the same or similar job, even your own kids must be paid minimum wage. (See exemptions from FLSA: http://www.dol.gov/elaws/esa/flsa/cl/exemptions.asp)
If the business is set up as a sole proprietorship or LLC, you're not required to withhold federal income taxes (FICA) if your child is under 18 years of age. You also don't have to pay federal unemployment tax (FUTA) until they reach 21. (Did you know that?) Just keep in mind, however, that if you pay them more than the standard deduction limit of $6,300 you will have to withhold federal income tax.
There is no FICA or FUTA exemption for employing your children in an incorporated business or if you have a partner that is not family. You should keep track of your child's hours like you do anyone else's, so that Department of Labor or the IRS can audit the file and see that they are consistent with your payment.
Wage reporting and tax withholding: if your child is working and getting paid, chances are they will have to pay some taxes. Generally, as long as your teenager is a dependent and they don’t earn more than the standard deduction limit for the year, they won’t have to file a separate tax return. The IRS considers anyone who is 18 and under a dependent. For 2015, the standard deduction limit is $6,300 so as long as they don’t make over that amount they won’t have to worry about filing a separate tax return. But if your child has unearned income (from investments), then they are subject to that same deduction threshold.
Questions? Feel free to call us and we can help you hire your children.
Lynn Talbott, MBA, PHR, has over 20 years' experience consulting with entrepreneurs of small- to mid-sized businesses in the HR and Office Management capacity. Her specialties are: coaching, training, and finding practical solutions for bookkeeping errors and HR blunders. Lynn has helped manage over 50 business start-ups. Many of those companies continue to rely on her expertise as they grow.