With each passing year, as networked technology becomes more and more integral to how companies do business, a simple yet grim reality comes further into focus: The cyberattacks will continue.

In fact, many experts are now urging business owners and their leadership teams to view malicious cyberactivity as more of a certainty than a possibility. Why? Because it seems to be happening to just about every company in one way or another.

A 2023 study by U.K.-based software and hardware company Sophos found that, of 3,000 business leaders surveyed across 14 countries (including 500 in the United States), a whopping 94% reported experiencing a cyberattack within the preceding year.

Creating a comprehensive strategy

What can your small-to-midsize business do to protect itself? First and foremost, you need a comprehensive cybersecurity strategy that accounts for not only your technology, but also your people, processes and as many known external threats as possible. Some of the primary elements of a comprehensive cybersecurity strategy are:

• Clearly written and widely distributed cybersecurity policies,
• A cybersecurity program framework that lays out how your company: 1) identifies risks, 2) implements safeguards, 3) monitors its systems to detect incidents, 4) responds to incidents, and 5) recovers data and restores operations after incidents,
• Employee training, upskilling, testing and regular reminders about cybersecurity,
• Cyberinsurance suited to your company’s size, operations and risk level, and
• A business continuity plan that addresses what you’ll do if you’re hit by a major cyberattack.

That last point should include deciding, in consultation with an attorney, how you’ll communicate with customers and vendors about incidents.

Getting help

All of that may sound a bit overwhelming if you’re starting from scratch or working off a largely improvised set of cybersecurity practices developed over time. The good news is there’s plenty of help available.

For businesses looking for cost-effective starting points, cybersecurity policy templates are available from organizations such as the SANS Institute. Meanwhile, there are established, widely accessible cybersecurity program frameworks such as the:

• National Institute of Standards and Technology’s Cybersecurity Framework,
• Center for Internet Security’s Critical Security Controls, and
• Information Systems Audit and Control Association’s Control Objectives for Information and Related Technologies.

Plug any of those terms into your favorite search engine and you should be able to get started.

Of course, free help will only get you so far. For customized assistance, businesses always have the option of engaging a cybersecurity consultant for an assessment and help implementing any elements of a comprehensive cybersecurity strategy. Naturally, you’ll need to vet providers carefully, set a feasible budget, and be prepared to dedicate the time and resources to get the most out of the relationship.

Investing in safety

If your business decides to invest further in cybersecurity, you won’t be alone. Tech researcher Gartner has projected global spending on cybersecurity and risk management to reach $210 billion this year, a 13% increase from last year. It may be a competitive necessity to allocate more dollars to keeping your company safe. For help organizing, analyzing and budgeting for all your technology costs, including for cybersecurity, contact us.

© 2024

One of the most effective ways to provide for your children in your estate plan is to set up trusts for them. Trusts offer many benefits, including the flexibility of when and how to make distributions, protection of assets from beneficiaries’ creditors and protection of assets from being divided as part of a beneficiary’s divorce. They may also help protect the funds from depletion by a beneficiary with a substance abuse problem, a gambling addiction or bad spending habits.

Many parents’ estate plans call for their assets to be split into equal shares and used to fund a separate trust for each child. But, depending on your circumstances, it may be preferable to pool your assets into a single “pot” trust.

Fair isn’t necessarily equal

Parents generally want to avoid “playing favorites,” so separate trusts appeal to their sense of fairness. But “fair” and “equal” aren’t necessarily the same thing. Think about how you use your funds now. If one of your children has a specific need — whether it’s college tuition, medical care or something else — it’s likely that you’ll pay for it without feeling any pressure to spend the same amount on your other children.

View your estate plan in the same light: Fairness means providing for your children’s needs, regardless of whether you distribute your assets equally.

For example, suppose you have two children, Stella and Lucy, ages 23 and 18, respectively. Stella recently graduated from college and Lucy is about to start. You’ve already spent more than $200,000 on Stella’s tuition and other college expenses. If you were to die tomorrow, and your estate plan divides your wealth equally between Stella and Lucy, Stella will come out ahead. That’s because she already received the benefit of $200,000 in college expenses. Lucy, on the other hand, will need to tap her trust fund to pay for college.

Consider a pot trust

A pot trust can be a great way to continue meeting your children’s individual needs and avoid giving one child a windfall, like Stella received in the example above. As the name suggests, you pool assets into a single trust and give the trustee full discretionary authority to distribute the funds among your children according to their needs.

Essentially, a pot trust allows the trustee to spend your money the way you would if you were alive. If one of your children has substantial education expenses or medical bills, the trustee has the authority to cover them, even at the expense of your other children’s inheritances.

For many families, a pot trust makes sense when children are relatively young and are likely to have differing needs that can change dramatically over time. If appropriate, your plan can call for the pot trust to be divided into separate trusts for each child at some point in the future — for example, when the youngest child reaches age 21, 25 or some other milestone.

Choose your trustee carefully

For a pot trust to be effective, it’s critical to choose your trustee — as well as a backup trustee — carefully. As with any type of trust, your trustee should be trustworthy and impartial and have the skills necessary to manage the trust assets. But for a pot trust, it’s particularly important for the trustee to have the ability to communicate effectively with the beneficiaries.

Because distributions depend on each beneficiary’s unique needs, the trustee must understand those needs, as well as your objectives for the trust, and be able to explain the reasoning behind his or her decisions to all the beneficiaries. Contact us with questions regarding a pot trust.

© 2024

There are many rewards for taking care of an elderly relative. They may include feeling needed, making a difference in the person’s life and allowing the person to receive quality care. In addition, you could also be eligible for tax breaks. Here’s a rundown of four of them:

1. Medical expenses. If the individual qualifies as your “medical dependent” and you itemize deductions on your tax return, you can include any medical expenses you incur for the person along with your own when determining your medical deduction. The test for determining whether an individual qualifies as your “medical dependent” is less stringent than that used to determine whether an individual is your “dependent,” which is discussed below. In general, an individual qualifies as a medical dependent if you provide over 50% of his or her support, including medical costs.

However, bear in mind that medical expenses are deductible only to the extent they exceed 7.5% of your adjusted gross income (AGI).

The costs of qualified long-term care services required by a chronically ill individual and eligible long-term care insurance premiums are included in the definition of deductible medical expenses. There’s an annual cap on the amount of premiums that can be deducted. The cap is based on age, and in 2024 goes from $470 for an individual age 40 or less to $5,880 for an individual over 70.

2. Filing status. If you aren’t married, you may qualify for “head-of-household” status by virtue of the individual you’re caring for. You can claim this status if:

• The person you’re caring for lives in your household,
• You cover more than half the household costs,
• The person qualifies as your “dependent,” and
• The person is a relative.

If the person you’re caring for is your parent, the person doesn’t need to live with you, so long as you provide more than half of the person’s household costs and the person qualifies as your dependent. A head of household has a higher standard deduction and lower tax rates than a single filer.

There are requirements for determining whether your loved one is a “dependent.” Dependency exemptions are suspended (or disallowed) for 2018 through 2025. But even though the dependency exemption is currently suspended, the dependency tests still apply when it comes to determining whether a taxpayer is entitled to various other tax benefits, such as head-of-household filing status.

For an individual to qualify as your “dependent,” the following must be true for the tax year at issue:

• You must provide more than 50% of the individual’s support costs,
• The individual must either live with you or be related,
• The individual must not have gross income in excess of an inflation-adjusted exemption amount,
• The individual can’t file a joint return for the year, and
• The individual must be a U.S. citizen or a resident of the U.S., Canada or Mexico.

3. Dependent care credit. If the cared-for individual qualifies as your dependent, lives with you and physically or mentally can’t take care of him- or herself, you may qualify for the dependent care credit for costs you incur for the individual’s care to enable you and your spouse to go to work.

4. Nonchild dependent credit. For 2018 through 2025, the Tax Cuts and Jobs Act (TCJA) established a $500 federal income tax credit for dependents who don’t qualify for the Child Tax Credit. A dependent parent can make you eligible for this $500 credit. However, your parent must pass the aforementioned gross income test to be classified as your dependent for purposes of this credit. You must also pay over half of your parent’s support.

The credit is phased out for taxpayers with adjusted gross income (AGI) above $200,000 ($400,000 for a married couple that files jointly). The credit is reduced by $50 for every $1,000 that your AGI exceeds the applicable threshold.

Contact us if you’d like to further discuss the tax aspects of financially supporting and caring for an elderly relative.

© 2024

Let’s say you own one or more vacant lots. The property has appreciated greatly and you’re ready to sell. Or maybe you have a parcel of appreciated land that you want to subdivide into lots, develop them and sell them off for a big profit. Either way, you’ll incur a tax bill.

For purposes of these examples, let’s assume that you own the vacant land directly as an individual or indirectly through a single-member LLC (SMLLC), a partnership or a multimember LLC that’s treated as a partnership for federal income tax purposes.

Here are a couple of scenarios and a strategy to consider.

Scenario 1: You simply sell vacant land that you’ve held for investment

If you’ve owned the land for more than one year and you’re not classified as a real estate dealer, any gain on sale will be a long-term capital gain (LTCG) eligible for lower federal income tax rates. The current maximum federal rate for LTCGs is 20%. You may also owe the 3.8% net investment income tax (NIIT) on all or part of your gain and maybe state income tax, too.

Scenario 2: You develop a parcel and sell improved lots

In this case, the federal income tax rules generally treat a land developer as a real estate dealer. If you’re classified as a dealer, the profit from developing and selling land is considered profit from selling inventory. That means the entire profit — including the portion from any pre-development appreciation in the value of the land — will be high-taxed ordinary income rather than lower-taxed LTCG. The maximum federal rate on ordinary income recognized by individual taxpayers is currently 37%. The 3.8% NIIT may also be owed and maybe state income tax, too. So, the total tax hit might approach 50% of the gain.

S corporation entity strategy to the rescue

Thankfully, there’s a strategy that allows favorable LTCG tax treatment for all the pre-development appreciation in the value of your land. However, any profit attributable to later subdividing, development and marketing activities will be high-taxed ordinary income because you’ll be treated as a dealer for that part of the process. But if you can manage to pay “only” the 23.8% maximum effective federal rate (20% + 3.8%), or maybe less, on the bulk of a large profit, that’s a win. Here’s a three-step plan to accomplish that tax-saving goal.

1. Establish an S corporation

If you’re the sole owner of the appreciated land, establish a new S corporation owned solely by you to function as the developer entity. If you own the land via a partnership, or via an LLC treated as a partnership for tax purposes, you and the other partners can form the S corporation and be issued stock in proportion to your partnership/LLC ownership percentages.

2. Sell the land to the S corporation

Next, sell the appreciated land to the S corporation for a price equal to the land’s pre-development fair market value. As long as the land has been held for investment and has been owned for more than one year, the sale will trigger a LTCG — equal to the pre-development appreciation — that won’t be taxed at more than the 23.8% maximum federal rate.

3. S corporation develops the land and sells it off

Next, the S corporation will subdivide and develop the property, market it and sell it off. The profit from these activities will be higher-taxed ordinary income passed through to the shareholder(s), including you. If the profit from development is big, you might pay the maximum 40.8% effective federal rate (37% + 3.8%) on that income. However, the part of your total profit that’s attributable to pre-development appreciation in the value of the land will be taxed at no more than the 23.8% maximum federal rate.

Seek professional help

The bottom line is if you’re simply selling appreciated vacant land that you’ve held for investment, the federal income tax results are straightforward. But if you’ll develop the land before selling, the S corporation developer entity strategy could be a big tax-saver in the right circumstances. However, it’s not a DIY project. Consult with us to avoid pitfalls.

© 2024

If you donate valuable items to charity and you want to deduct them on your tax return, you may be required to get an appraisal. The IRS requires donors and charitable organizations to supply certain information to prove their right to deduct charitable contributions.

How can you protect your deduction?

First, be aware that in order to deduct charitable donations, you must itemize deductions. Due to today’s relatively high standard deduction amounts, fewer taxpayers are itemizing deductions on their federal returns than before the Tax Cuts and Jobs Act became effective in 2018.

If you clear the itemizing hurdle and donate an item of property (or a group of similar items) worth more than $5,000, certain appraisal requirements apply. You must:

• Get a “qualified appraisal,”
• Receive the qualified appraisal before your tax return is due,
• Attach an “appraisal summary” to the first tax return on which the deduction is claimed,
• Include other information with the return, and
• Maintain certain records.

Keep these definitions in mind. A “qualified appraisal” is a complex and detailed document. It must be prepared and signed by a qualified appraiser. An “appraisal summary” is a summary of a qualified appraisal made on Form 8283 and attached to the donor’s return.

While courts have allowed taxpayers some latitude in following these rules, you should aim for exact compliance.

The qualified appraisal isn’t submitted to the IRS in most cases. Instead, the appraisal summary, which is a separate statement prepared on an IRS form, is attached to the donor’s tax return. However, a copy of the appraisal must be attached for gifts of art valued at $20,000 or more and for all gifts of property valued at more than $500,000, other than inventory, publicly traded stock and intellectual property. If an item of art has been appraised at $50,000 or more, you can ask the IRS to issue a “Statement of Value” that can be used to substantiate the value.

What if you don’t comply with the requirements?

The penalty for failing to get a qualified appraisal and attach an appraisal summary to the return is denial of the charitable deduction. The deduction may be lost even if the property was valued correctly. There may be relief if the failure was due to reasonable cause.

Are there exceptions to the requirements?

A qualified appraisal isn’t required for contributions of:

• A car, boat or airplane for which the deduction is limited to the charity’s gross sales proceeds,
• Stock in trade, inventory or property held primarily for sale to customers in the ordinary course of business,
• Publicly traded securities for which market quotations are “readily available,” and
• Qualified intellectual property, such as a patent.

Also, only a partially completed appraisal summary must be attached to the tax return for contributions of:

• Nonpublicly traded stock for which the claimed deduction is greater than $5,000 and doesn’t exceed $10,000, and
• Publicly traded securities for which market quotations aren’t “readily available.”

What if you have more than one gift?

If you make gifts of two or more items during a tax year, even to multiple charitable organizations, the claimed values of all property of the same category or type (such as stamps, paintings, books, stock that isn’t publicly traded, land, jewelry, furniture or toys) are added together in determining whether the $5,000 or $10,000 limits are exceeded.

The bottom line is you must be careful to comply with the appraisal requirements or risk disallowance of your charitable deduction. Contact us if you have any further questions or want to discuss your charitable giving plans.

© 2024

Many people dream of turning a hobby into a regular business. Perhaps you enjoy boating and would like to open a charter fishing business. Or maybe you’d like to turn your sewing or photography skills into an income-producing business.

You probably won’t have any tax headaches if your new business is profitable over a certain period of time. But what if the new enterprise consistently generates losses (your deductions exceed income) and you claim them on your tax return? You can generally deduct losses for expenses incurred in a bona fide business. However, the IRS may step in and say the venture is a hobby — an activity not engaged in for profit — rather than a business. Then you’ll be unable to deduct losses.

By contrast, if the new enterprise isn’t affected by the hobby loss rules, all otherwise allowable expenses are deductible, generally on Schedule C, even if they exceed income from the enterprise.

Important: Before 2018, deductible hobby expenses could be claimed as miscellaneous itemized deductions subject to a 2%-of-AGI “floor.” However, because miscellaneous deductions aren’t allowed from 2018 through 2025, deductible hobby expenses are effectively wiped out from 2018 through 2025.

How to NOT be deemed a hobby

There are two ways to avoid the hobby loss rules:

1. Show a profit in at least three out of five consecutive years (two out of seven years for breeding, training, showing or racing horses).
2. Run the venture in such a way as to show that you intend to turn it into a profit maker rather than a mere hobby. The IRS regs themselves say that the hobby loss rules won’t apply if the facts and circumstances show that you have a profit-making objective.

How can you prove you have a profit-making objective? You should operate the venture in a businesslike manner. The IRS and the courts will look at the following factors:

• How you run the activity,
• Your expertise in the area (and your advisors’ expertise),
• The time and effort you expend in the enterprise,
• Whether there’s an expectation that the assets used in the activity will rise in value,
• Your success in carrying on other activities,
• Your history of income or loss in the activity,
• The amount of any occasional profits earned,
• Your financial status, and
• Whether the activity involves elements of personal pleasure or recreation.

Case illustrates the issues

In one court case, partners operated a farm that bought, sold, bred and raced Standardbred horses. It didn’t qualify as an activity engaged in for profit, according to a U.S. Appeals Court. The court noted that the partnership had a substantial loss history and paid for personal expenses. Also, the taxpayers kept inaccurate records, had no business plan, earned significant income from other sources and derived personal pleasure from the activity. (Skolnick, CA 3, 3/8/23)

Contact us for more details on whether a venture of yours may be affected by the hobby loss rules, and what you should do to avoid tax problems.

© 2024

Beware of Scammers

The IRS Dirty Dozen list is an annual release that taxpayers eagerly await with the same enthusiasm as a dentist appointment. It’s a compilation of the year’s most egregious tax scams, and for 2024, it’s as colorful as ever. Let’s dive into the murky waters of tax evasion and emerge with our wallets—and our integrity—intact.

1. Bogus Tax Avoidance Strategies: This year, the IRS warns against schemes with an international flair. Picture this: offshore accounts disguised as beach vacations, and tax shelters that are less ‘shelter’ and more ‘house of cards.
2. Improper Art Donations: The wealthy are not immune to the siren call of dodgy deductions. Improper art donation deductions are the new ‘abstract expressionism,’ while charitable remainder annuity trusts and monetized installment sales are the financial equivalent of a Jackson Pollock splatter—messy and confusing.
3. Spearphishing Extravaganza: Tax pros and businesses, beware! The IRS cautions against emails that are fishier than a sushi platter. These scams are like the ‘new client’ who turns out to be a Nigerian prince.
4. Social Media Misadvisors: Taking tax advice from social media is akin to taking health advice from a candy wrapper. Inaccurate or misleading tax information is circulating faster than cat videos.
5. Ghost Preparers: These are the tax preparers who vanish with your cash faster than a magician’s rabbit. The IRS urges taxpayers to avoid these apparitions at all costs.
6. Fake Charities: In the wake of disasters, fake charities pop up like mushrooms after rain, exploiting taxpayer generosity. Don’t let your good intentions fund a scammer’s luxury car.
7. Offer in Compromise Mills: These outfits claim they can negotiate your tax debt down to pennies on the dollar. In reality, they’re more likely to reduce your bank account than your tax bill.
8. Fuel Tax Credit Fictions: Unless you’re operating a farm or a fleet of taxis, you probably don’t qualify for fuel tax credits. If someone says otherwise, they might as well be selling oceanfront property in Arizona.
9. Online Account Setup Scams: If someone offers to help you set up an IRS online account, they might as well be asking for the keys to your financial kingdom. Guard your personal information like a dragon hoards gold.
10. Employee Retention Credit Claims: Aggressive promoters might urge small businesses to make questionable claims. It’s like claiming your pet hamster as a dependent because he’s been a loyal companion during Zoom calls.
11. Phishing and Smishing Scams: The IRS warns of a deluge of emails and texts trying to hook your sensitive information. Remember, the IRS won’t text you to say you’ve won a tax refund lottery.
12. Monetized Installment Sales: These are structuring strategies that promise the elimination of recognizing gains from a large sale like a business. This is the typical one plus one equals three strategy. It sounds great, but the math does not work.

There are a few honorable mentions that we would add to list to be on the lookout for:

• Charitable LLC: Brought to the forefront by Mark Zuckerberg, the scammers have grabbed hold. Promising the ability to “give money” to charity but keeping and using it as you want. Of course, this minor problem gets solved with life insurance.

• Charitable Remainder Trust: A very legitimate structure, until the scammers take hold. A slight of hand trick that lets you keep the assets gifted to charity. Look for this one on the 2025 list.

• Equipment Rental Structures: It seems like the conservation easement folks found a new game. A convoluted financing structure that makes it look like you are in an active trade to gain immediate depreciation benefits. The benefits turn when and if the financing gets paid off, so the immediate benefits get mostly taken back if the approach stands.

The 2024 IRS Dirty Dozen list serves as a reminder that if something sounds too good to be true, it probably belongs on next year’s list. Stay vigilant, stay informed, and maybe next year, we’ll find tax scams have gone the way of the dodo—or at least the floppy disk. For a detailed description of each scam, please refer to the IRS official website. Remember, navigating tax mitigation is like a game of chess; it pays to think several moves ahead. Stay safe!

Buckle up, America: Major tax changes are on the horizon. The reason has to do with tax law and the upcoming elections.

Our current situation

The Tax Cuts and Jobs Act (TCJA), which generally took effect in 2018, made sweeping changes. Many of its provisions are set to expire on December 31, 2025.

With this date getting closer each day, you may wonder how your federal tax bill will be affected in 2026. The answer isn’t clear because the outcome of this November’s presidential and congressional elections is expected to affect the fate of many expiring provisions. A new political landscape in Washington could also mean other tax law changes.

Corporate vs. individual taxes

The TCJA cut the maximum corporate tax rate from 35% to 21%. It also lowered rates for individual taxpayers, with the highest tax rate reduced from 39.6% to 37%. But while the individual rate cuts expire in 2025, the law made the corporate tax cut “permanent.” (In other words, there’s no scheduled expiration date. Tax legislation could still change the corporate tax rate.)

In addition to lowering rates, the TCJA revised tax law in many other ways. On the individual side, standard deductions were increased, significantly reducing the number of taxpayers who benefit from itemizing deductions for certain expenses, such as charitable donations and medical costs. (You benefit from itemizing on your federal income tax return only if your total allowable itemized write-offs for the year exceed your standard deduction.)

In addition, through 2025, certain itemized deductions are eliminated. Others are more limited, including those for home mortgage interest and state and local tax (SALT).

For small business owners, one of the most significant changes is the potential expiration of the Section 199A qualified business income (QBI) deduction. This is the write-off for up to 20% of QBI from noncorporate pass-through entities, including S corporations and partnerships, as well as from sole proprietorships.

The expiring provisions will affect many taxpayers’ tax bills in 2026, unless legislation extending them is signed into law.

Possible scenarios

The outcome of the presidential election in less than five months, as well as the balance of power in Congress, will determine the TCJA’s future. Here are four possible scenarios:

1. All of the TCJA provisions scheduled to expire will actually expire at the end of 2025.
2. All of the TCJA provisions scheduled to expire will be extended past 2025 (or made permanent).
3. Some TCJA provisions will be allowed to expire, while others will be extended (or made permanent).
4. Some or all of the temporary TCJA provisions will expire — and new laws will be enacted that provide different tax breaks and/or different tax rates.

How your tax bill will be affected in 2026 will partially depend on which one of these scenarios becomes reality and whether your tax bill went down or up when the TCJA became effective back in 2018. That was based on a number of factors including your income, your filing status, where you live (the SALT limitation negatively affects more taxpayers in certain states), and whether you have children or other dependents.

Your tax situation will also be affected by who wins the presidential election and who controls Congress. Democrats and Republicans have competing visions about how to proceed when it comes to taxes. Proposals can become law only if tax legislation passes both houses of Congress and is signed by the President (or there are enough votes in Congress to override a presidential veto).

The tax horizon

As the TCJA provisions get closer to expiring, it’s important to know what might change and what tax-wise moves you can make if the law does change. We’ll keep you informed about what’s ahead. We’re here to answer any questions you may have.

© 2024

Here are some of the key tax-related deadlines affecting businesses and other employers during the third quarter of 2024. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

July 15

• Employers should deposit Social Security, Medicare and withheld income taxes for June if the monthly deposit rule applies. They should also deposit nonpayroll withheld income tax for June if the monthly deposit rule applies.

July 31

• Report income tax withholding and FICA taxes for second quarter 2024 (Form 941) and pay any tax due. (See the exception below, under “August 12.”)
• File a 2023 calendar-year retirement plan report (Form 5500 or Form 5500-EZ) or request an extension.

August 12

• Report income tax withholding and FICA taxes for second quarter 2024 (Form 941), if you deposited on time and in full all the associated taxes due.

September 16

• If a calendar-year C corporation, pay the third installment of 2024 estimated income taxes.
• If a calendar-year S corporation or partnership that filed an automatic six-month extension:
• File a 2023 income tax return (Form 1120-S, Form 1065 or Form 1065-B) and pay any tax, interest and penalties due.
• Make contributions for 2023 to certain employer-sponsored retirement plans.

• Employers should deposit Social Security, Medicare and withheld income taxes for August if the monthly deposit rule applies. They should also deposit nonpayroll withheld income tax for August if the monthly deposit rule applies.

© 2024

With school out, you might be hiring your child to work at your company. In addition to giving your son or daughter some business knowledge, you and your child could reap some tax advantages.

Benefits for your child

There are special tax breaks for hiring your offspring if you operate your business as one of the following:

• A sole proprietorship,
• A partnership owned by both spouses,
• A single-member LLC that’s treated as a sole proprietorship for tax purposes, or
• An LLC that’s treated as a partnership owned by both spouses.

These entities can hire an owner’s under-age-18 children as full- or part-time employees. The children’s wages then will be exempt from the following federal payroll taxes:

• Social Security tax,
• Medicare tax, and
• Federal unemployment (FUTA) tax (until an employee-child reaches age 21).

In addition, your dependent employee-child’s standard deduction can shelter from federal income tax up to $14,600 of 2024 wages from your business.

Benefits for your business

When hiring your child, you get a business tax deduction for employee wage expense. The deduction reduces your federal income tax bill, your self-employment tax bill and your state income tax bill, if applicable.

Note: There are different rules for corporations. If you operate as a C or S corporation, your child’s wages are subject to Social Security, Medicare and FUTA taxes, like any other employee’s. However, you can deduct your child’s wages as a business expense on your corporation’s tax return, and your child can shelter the wages from federal income tax with the $14,600 standard deduction for single filers.

Traditional and Roth IRAs

No matter what type of business you operate, your child can contribute to an IRA or Roth IRA. With a Roth IRA, contributions are made with after-tax dollars. So, taxes are paid on the front end. After age 59½, the contributions and earnings that have accumulated in the account can be withdrawn free from federal income tax if the account has been open for more than five years.

In contrast, contributions to a traditional IRA are deductible, subject to income limits. So, unlike Roth contributions, deductible contributions to a traditional IRA lower the employee-child’s taxable income.

However, contributing to a Roth IRA is usually a much better idea for a young person than contributing to a traditional IRA for several reasons. Notably, your child probably won’t get any meaningful write-offs from contributing to a traditional IRA because the child’s standard deduction will shelter up to $14,600 of 2024 earned income. Any additional income will likely be taxed at very low rates.

In addition, your child can withdraw all or part of the annual Roth contributions — without any federal income tax or penalty — to pay for college or for any other reason. Of course, even though your child can withdraw Roth contributions without adverse tax consequences, the best strategy is to leave as much of the Roth balance as possible untouched until retirement to accumulate a larger tax-free sum.

The only tax law requirement for your child when making an annual Roth IRA contribution is having earned income for the year that at least equals what’s contributed for that year. There’s no age restriction. For the 2024 tax year, your child can contribute to an IRA or Roth IRA the lesser of:

• His or her earned income, or
• $7,000.

Making modest Roth contributions can add up over time. For example, suppose your child contributes $1,000 to a Roth IRA each year for four years. The Roth account would be worth about $32,000 in 45 years when he or she is ready to retire, assuming a 5% annual rate of return. If you assume an 8% return, the account would be worth more than three times that amount.

Caveats

Hiring your child can be a tax-smart idea. However, your child’s wages must be reasonable for the work performed. Be sure to maintain the same records as you would for other employees to substantiate the hours worked and duties performed. These include timesheets, job descriptions and W-2 forms. Contact us with any questions you have about employing your child at your small business.

© 2024