You were there for your child when they lost their first tooth. You were there for them when they graduated kindergarten. Now they are ready to enter the workforce, and you will be there when they get their first paycheck. A summer job is a rite of passage for many teens to earn money and take their first step into learning financial responsibility. They will have questions about taxes and why Uncle Sam took a portion of their earnings. Here is what you need to know to help guide them. 

If your teen is working an average wage-paying job, they will fill out a Form W-4. Remember, claiming zero allowances means you want the most taxes taken out of your paycheck. It’s usually the safest strategy but can delay hard-earned cash until they file their first tax return. Claiming too many allowances can result in under-withholding and a surprise tax bill in April. 

The standard deduction for single individuals increased from $12,550 in 2021 to $12,950 in 2022. Therefore, your child can now earn up to $12,950 in their summer job and not pay any income tax. 

Your teen can make even more than the standard deduction. Suppose your teen contributes $6,000 of their earned income to a traditional IRA. In that case, they could earn $18,950 tax-free by combining the standard deduction and the maximum allowed deductible contribution to an IRA, which is $6,000 for 2022. A great way to teach savings is to have your child invest a portion of their earnings in a Roth IRA. A Roth IRA offers tax-free gains and distributions. The only downside is that the contributions to a Roth IRA are not tax-deductible.

If you are self-employed, consider hiring your children to work for you. Rather than supporting your children with your after-tax dollars, you can hire them in your business and pay them with tax-deductible dollars. Of course, their employment must be legitimate, and their pay must be appropriate for the hours and job worked. Giving your child a reasonable salary reduces your self-employment income and tax.  

Example: Let’s say you own an unincorporated business and are in the 24% tax bracket. If you hire and pay your child $16,000 a year, you can reduce your income by $16,000. This will save you $3,840 of income tax (24% of $16,000). After the standard deduction, your child will have taxable income of $3,050 ($16,000 – $12,950), and the tax is $305 (10% of $3,050). 

Suppose your business is unincorporated and you pay wages to a child under 18. In this sense, the pay will not be subject to FICA (Social Security and Medicare taxes) because services performed by a child under 18 while employed by a parent are exempt from FICA taxes. Therefore, your child does not have to pay FICA taxes, and your business won’t have to pay its half either.

A similar exemption applies for FUTA, which exempts the earnings paid to a child under 21 from federal unemployment tax. The FICA and FUTA exemptions only apply if a child is employed solely by their parent or by a partnership consisting solely of their parents. These exemptions do not apply to incorporated businesses or a partnership that includes non-parent partners. Hiring your child over someone else will incur no extra business costs. 

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Lauren Garabedian Ruff, CPA, is the Chief Operating Officer & Business Advisor at The Garabedian Group, Inc. in Fresno, CA. She specializes in family business support, succession planning, and tax. Lauren has been in practice for ten years. To contact Lauren Garabedian Ruff, call (559) 472-7370 or visit  www.thegarabediangroup.cpa.