Teach Your Kids the Truckstop Business

With summer coming, teenagers across America are looking for summer jobs. For parents who also own their own business, hiring their minor children can be a way to teach kids the family business, bolster their kids’ work ethic and minimize their own taxes.

“Not only would a business owner reap tax benefits, but it is a way to teach the children financial responsibility,” said Fred Timmons, a certified public accountant at Tsakopulos Brown Schott & Anchors in San Antonio, Texas, and the incoming chairman of the Texas Society of CPAs. “A business owner who hires a child, sets up checking account for them and pays them a salary can teach them to take care of income.”

A start on savings
Sole proprietors or those who operate LLCs don’t have to withhold FICA taxes on their minor children and the children can earn up to $5,950 without incurring income tax.

Children who go to work at their parents’ S Corporation or C Corporation will be subject to FICA and income taxes, but will be taxed at a lower bracket than their parents.

“It is taking money that would be taxed at the parents’ income level and it is taxed at the child’s rate,” said Abe Schneier, senior technical manager, American Institute of CPAs.

For example, if a parent owns an LLC, earns $120,000 and is in the 33 percent tax bracket and pays her child $5,950, she’d save just about $2,000 in taxes, Timmons explained.

“It also gives the parent the ability to help the child fund an IRA,” Schneier said.

Workers can contribute up to $5,000 per year to a Roth IRA if they have earned income to substantiate it, said Jason Collier, a certified financial planner with Collier, Webb, Bowden & Associates in Sandy, Utah.

That early investing for teens could have a huge payout. For example, a teen who works from the ages of 14-18 and contributes $5,000 a year to a Roth IRA would have just over $743,000 when he hits 60, assuming an 8 percent rate of growth, Collier said.

“In our scenario you put $25,000 into a Roth and it turned into nearly $740,000 totally tax free,” Collier said. “It is a way to transfer money to your children essentially tax free, and it gives them the opportunity to put it in a Roth where it can grow tax free.”

Teens could also withdraw money from their Roth IRA penalty free to pay for college. Collier suggests business owners consult with their tax advisors for specific tax implications.

Follow the rules
Parents do need to follow some parameters before hiring their children.

“Cross your t’s and dot your i’s on this one because the IRS will look at it, and if they think you’re doing it just to avoid taxes, you risk ruining the whole operation,” Schneier advised.

There has to be an actual function the child performs and the job description and the hours need to be documented. Plus, the wages need to be market price.

“Pay actual wages for actual services,” Schneier said, adding that the position should be ongoing. “You can’t just do it one year and not the next or until the kid goes off to college.”

Parents also have to be sure they are complying with federal and state labor laws, but Timmons said there is not a rule of thumb for when a child can go to work in the family business. “Certainly a 13-year-old can help in filing or things in the office,” he said. “If you pay your five year old a wage, I think the IRS would want to talk to you,” he said.

This article originally ran in Stop Watch magazine. Stop Watch provides in-depth content to assist NATSO members in improving their travel plaza business operations and provides context on trends and news affecting the industry. The magazine is mailed to NATSO members bimonthly. If you are a member and not receiving Stop Watch, submit a request to be added to the mailing list. Not a member? Join today or submit a request to receive additional information.