Employing a child reduces the tax a parent pays by shifting their high-taxed income into their child's lower tax bracket.  In some cases, this income may be tax-free.  Correlating to the parent's income shifting, the child will have earned income and will be able to contribute to a Traditional or a Roth IRA.

Another area for potential tax savings is education credits. Often, business owners' incomes exceed certain thresholds that prevent them from realizing any benefit from education credits. However, these credits can be shifted to a child if that child has earned income. In order to accomplish this, parents must sacrifice the exemption they would normally claim for their dependent child. Before making the decision to disclaim the exemption, an analysis under various scenarios should be done to determine who would get the most benefit.

Finally, if the child works for his or her parent's sole proprietorship or a partnership that is wholly owned by the child's parents, then the child is exempt from FICA and FUTA taxes. 

For additional information, please contact Shauna Oversby, CPA, MPAcc (Tax) at soversby@bpcpa.com or 425.454.7990.