Technical topics regarding tax preparation.
19-Jul-2021 12:53pm
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Hi Pros,
Hope all is well!
Just want to confirm, can I hire my kids as independent contractor for my LLC and let him use the income to set up IRA account?
Thanks!
19-Jul-2021 1:07pm
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Sure, so long as the amount you pay is limited to a reasonable value for the services they're providing.
But I bet they're really employees.
And remember that employees are exempt from Social Security & Medicare tax if they are your kids under age 18. (Assuming your LLC isn't taxed as a corporation.)
19-Jul-2021 1:17pm
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Yep, and if there are no other employees....I've seen them on 1099's. Just have to report on their 1040's that they're not subject to SE....and hope for the best. Maybe use MISC form and box 3?
19-Jul-2021 2:38pm
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If they're not employees, why wouldn't they be subject to self-employment tax?
19-Jul-2021 4:17pm
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beardenjv wrote:If they're not employees, why wouldn't they be subject to self-employment tax?
Agreed. The FICA exemption is only available for children as employees, not as contractors. You have to issue a W-2 to take advantage of this dynamic.
~Captcook
19-Jul-2021 6:49pm
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Some parents want to pay SE. For example, my daughter is special needs. With coaching, she can earn money. The parents of several of her peers had their children earn enough money to obtain the necessary credits for Medicare and Social Security Disability. I believe if you earn six credits before the age of 22 or 24 you qualify.
Cathy
CathysTaxes
3-Dec-2021 3:53pm
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@CaptCook
In continuing with the scenario that beardenjv wrote - Kids under 18 and parent(s) Sole proprietor or LLC (not filed as a corporation). If the kids are employees and you have to issue W-2s, I am assuming you would have to file 941s too?
3-Dec-2021 4:14pm
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Because there are no payroll taxes due, there are no wages to list in Boxes 3 or 5. Thus, no 941s are necessary.
You will likely run into issues with trying to use online filing services for such a W-2.
~Captcook
3-Dec-2021 4:20pm
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I always advise filing a W-2 to substantiate the wages as both the business deduction and the potential contribution to a Roth IRA for the child.
I agree with the Captain, no 941 or 940 required.
4-Dec-2021 4:35pm
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@CaptCook and @ManVsTax
Thank you both.
9-Dec-2021 1:07pm
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1. You can establish a SEP IRA, too, and have your kids covered, in addition to their Roth contribution. Then do SEP to Roth conversion, at their tax rate (may end up being free).
2. To avoid having misunderstandings re: no withholdings taken out, I ususally show box 1 amount again in box 14 with "family employee" description.
9-Dec-2021 5:25pm
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FYI - in Texas, if wages are paid via a sole proprietorship, then unemployment taxes are not applicable on wages paid to spouse or kids. However, since LLCs are state entities which are not ignored, Texas does not provide this exemption for wages paid from an LLC to spouse and/or kids. So check your state.
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