Sole Proprietor - Hiring a Dependent Child - 2019 Worksheet

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This calculator computes the financial gain (tax savings) to a family when a sole proprietor employs his or her dependent child. Similar results occur when a partnership with parents as the only partners employ a dependent child.

Note: This calculator assumes the wages your client pays to the child will reduce his self-employment income. It does not deal with phase-outs that occur due to changes in adjusted gross income.

Example

Your client owns a small business as a sole proprietor. Should he hire his child to work for him during the summer and earn $15,000? Doing this would reduce your client's taxable income, but he would lose the ability to claim the child as a deduction. Also, the child would have to pay taxes on the income. Does hiring the child do more economic harm than good?

Field Input
Age 16
Wages $15,000
Self-employment income $110,000
Child remains as your dependent? No
Federal tax rate 24%
Value of child's service to the business $15,000

In this example, the net cost to your client (the taxpayer) is $9,534.90 and the net income to his child is $14,720. The net gain to the family is $20,185.10.

Notes

  • The amount in the Federal income tax field for the taxpayer is computed by adding together the wages, Social Security, Medicare, federal unemployment tax, and state payroll taxes; subtracting the lost SE tax adjustment; and multiplying the result by the combined tax rate minus the state tax rate.
  • The amount in the State income tax field for the taxpayer is computed by adding together the wages, Social Security, Medicare, and federal unemployment tax; subtracting the lost SE tax adjustment; and multiplying it by the state tax rate.
  • The amount you enter in the Self-employment income field should equal the SE income before hiring the dependent child.
  • There are special classes of employment that determine the rules governing what is calculated in the Social Security and medicare and Federal unemployment tax fields. Because the dependent child is a "Family Employee" (employed by the parent or by a partnership in which each partner is a parent of the child), the child is exempt until age 18 from social security tax, and exempt until age 21 from unemployment tax. See IRS Publication 15, section 3 for details.

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