Parent-owned practices benefit from hiring offspring
Photo of Janice Stanton by Austin Walsh.
When Rex Redlingshafer Jr. had an interest in becoming a lawyer, his parents put him to work. “From 8 a.m. to 5 p.m., Rex worked in our law firm during his college summers,” says Janice Stanton, co-founder of Stanton & Redlingshafer in Kansas City, Mo., and proud parent. “Typing, messengering, filing—he saw that being a lawyer wasn’t always glory.” With responsibility being a fundamental trait for successful lawyers, Stanton says her son “also experienced the stresses that can come with responsibility.” Though instilling a work ethic was Stanton’s motivation, Kathy Laursen—a certified public accountant and partner at BKD in Kansas City—offers another reason for lawyers who own their own firms to hire their kids: tax advantages.
“Business owners may take a tax deduction by employing a child in the summer, or on a part-time basis, assuming that they follow the IRS rules of actually having the child perform work and pay an amount of compensation that is reasonable,” Laursen says. “For the child, up to $6,100 of earned wages can be exempt from federal income tax in 2013 as long as the child didn’t earn income from other sources.”
For children under 18, wages are also exempt from FICA and Medicare tax only if the business is “a sole proprietorship or parents in a partnership” without nonparent owners. At age 18, “the rules require collecting payroll taxes—FICA and Medicare—when a child is working for his or her parents. Federal unemployment taxes are exempt for children under 21,” she says. “Kiddie tax” rules apply until age 24, Laursen notes, “so a college student who spends the summer working for his or her parents, earning up to $6,100 with no income earned from other sources, could have no federal income tax liability, and the parent(s) [with] a tax deduction calculated at the maximum federal tax bracket of 39.6 percent would save $2,416, less potential payroll tax of 7.65 percent … for a net savings of nearly $2,000.” More state tax savings are possible.
THE EYES OF THE IRS
Expect IRS scrutiny on unreasonable terms, says Laursen. “If your child never sets foot in the business or you’re paying $1,000 an hour, that’s obviously not realistic.”
Prohibitions on children working in hazardous situations exist under applicable labor laws. John Barr, a partner at Jackson Lewis in Richmond, Va., specializing in labor and employment law, puts it succinctly: “Don’t let your children do dangerous stuff.” Making copies or answering phones is not hazardous, but consider the environment in which these duties occur. “A hazardous situation, for example, could occur in a criminal practice with potentially violent or sexual offender clients.” Barr also advises to check state laws, which track the U.S. Department of Labor provisions, he says. “However, states are allowed to have more stringent requirements.”
Susan A. Berson is a partner with the Banking & Tax Law Group of Leawood, Kan.
