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Lane Keeter, CPA

Partner: Tax Consulting, Estate Planning, and Heber Springs Managing Partner

In The Good Old Summer Time

School is out, summer is upon us and the livin' is easy! Well, that latter statement is up for debate, and students needing a summer job may not quite feel that way. Many students of high school and college age have hit the pavement looking for summer work, or perhaps are working for businesses owned by their parents. 

With current staffing and labor shortages still being keenly felt by employers, "For Hire" signs and appeals are abundant, so students looking for employment may have more options with better pay than is typically the case. Here are a few quick pointers to maximize the situation for your student, and which also might help you reduce your own tax burden if you as the parent happen to employ your own child in your enterprise.

Many students only work in the summer and, consequently, may not make enough money to require the filing a tax return for the year. Nonetheless, all too often, federal and/or state income taxes are withheld from their pay, forcing them to have to file a tax return if they want to get the withheld taxes back in their pockets.

There is a way around this withholding for some students. If the student owed no income tax the prior year and doesn't expect to owe any for this year, withholding can be completely avoided, which may save the hassle and expense of filing a tax return later. This is accomplished simply by writing the word "Exempt" in the appropriate space on Form W-4 when completed by the student for the employer. See the instructions for Form W-4 for more information.

Further, the exemption is for income tax withholding only. It does not stop the withholding of the student's share of Social Security and Medicare taxes, which always must be withheld, with one exception discussed next.

That said, here's a potentially valuable "did you know" … did you know that hiring your children to work in your business could lower your payroll tax bill?  

Yep, it's true in certain situations. If you are a sole proprietor, a single-member LLC that is disregarded for tax purposes, or a husband-wife partnership, you can hire your kids to work for you, and if they are under age 18, no Social Security or Medicare tax is due for them. 

That's a 15.3% tax savings when you consider both the employer and employee shares of the FICA tax! Additionally, you don't have to pay unemployment tax on them until they reach the ripe old age of 21.

To further sweeten the deal, what your children earn from working for you is deductible by your business, so such pay also reduces your own income tax and self-employment tax liabilities. 

Finally, here's an idea to further financially help a child or grandchild who will be working this summer. Consider making a contribution to a Roth IRA this year for the child. You can contribute up to $6,000 to a Roth IRA in a child or grandchild's name.

By making this contribution, which by the way counts toward the $16,000 annual gift tax exclusion you have, you can help the child get started on building a solid retirement foundation.  

Caution, however, as the contribution is limited to the amount of earned income the child actually makes, as is the case for anyone, so be sure you have this information before funding the Roth to the max.

There are key tax benefits associated with Roth IRAs, such as the ability to make tax-free withdrawals (including withdrawals of earnings) after age 59½ or to pull out up to $10,000 in earnings tax-free at anytime you want to buy a first home (contributions can be pulled out tax-free at any time as well). 

To show the power of this, consider one $6,000 contribution made at age 15 to a Roth that earns 6.5% per year. That single contribution will be worth almost $140,000 by age 65 and over $191,000 by age 70. 

The above example shows the beautiful power of compounding in action. Just imagine what could happen if contributions are made each year of the child's working life! 

Lane Keeter, CPA is the Senior Partner of EGP, PLLC, CPAs & Consultants (, a full-service financial firm with offices around Arkansas, Managing Partner of EGP's Heber Springs office, and winner of The Sun-Times Reader's Choice Award for Best Accountant

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