The Farm CPA
Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.
Pay Your Kids; It Saves Taxes!
Jul 31, 2014
We had a reader ask the following questions:
"Have a good understanding of payroll taxes on payroll paid to a child under 18 working in the operation. The laws are not very concise in my situation. Currently my parents and myself are 1/3 owners of a LLC taxed as a partnership. I am divorced with 50/50 custody of child. Since I am an owner in the LLC and "single parent" can the child be paid without withholding payroll taxes? Thank you for your help! "
My brother and I worked on our farm during my high school and college days. We helped with spring and fall planting and I operated the combine from when I was about 15 years old. However, my parents did not pay us in the most efficient tax manner. Instead of paying us a cash wage, they bought my brother and I a new car and paid for college directly out of their pocket. They, instead, should have paid us a wage.
By paying a wage to us for our effort, they would reduce their income by the amount of the wage and during the time we were under age 18, the wages paid would not be subject to any payroll taxes. It would be exempt from FICA, Medicare, FUTA and so on. And in today environment, my brother and I could earn slightly more than $6,000 and not pay any federal income taxes. In some cases, a small amount of state income taxes might be owed.
Now for today's questions. A farmer who operates as a sole proprietor may pay their children under age 18 wages and be exempt from payroll taxes. If the farmer operates as a partnership (either regular or a LLC taxed as a partnership), paying wages to children under age 18 is still exempt from payroll taxes if the only partners of the partnership/LLC are parents of the children. In the current case, since two the "partners" in the LLC are the child's grandparents, the LLC would need to pay payroll taxes on the wages paid to the child.
Even if the LLC/partnership needs to pay payroll taxes, in most cases, it still makes sense to pay the child for services rendered since the child is usually in a very low or no tax bracket.
For additional information on the rules related to paying children in your business, see this link.