July 9th, 2018
At the beginning of the summer, it seems like every kid is vying for a summer job. As a parent, this can be the perfect opportunity for a lesson about managing money. Teenagers can get experience with different jobs, learn about possible future careers and earn some money in the process.
Saving for Big and Small Expenses
Encouraging your child to save a portion of their earnings is one learning tool. Learning the importance of saving will serve them well during their lifetimes. Whether they save for a certain purchase (i.e., concert tickets, new clothing, etc.) or for a longer-term goal (i.e., car, college, house, retirement), or even a little for each, the lessons learned at an early age will help them in the future. Ultimately if you can teach your children to make saving a habit, they will enjoy watching their funds grow.
How to Invest
In addition, you can involve your child in the investment decisions of their savings. They can invest in cash, diversified exchange-traded funds (ETFs), mutual funds or even individual securities. This process can help you educate them on what will be incredibly helpful investment knowledge for their future.
Saving for Retirement
You may want to consider establishing and funding a Roth IRA for your child. A Roth IRA contribution is allowed for the lesser of his or her earned income in 2018 or $5,500. Though a Roth IRA contribution is not a deduction (subtraction) on their tax return, the new tax law increased the standard deduction to $12,000 for single taxpayers, which means anyone with earnings less than $12,000 will pay zero federal income taxes.
Remember, states have different thresholds and there can still be a state tax liability, even though there is no federal liability. There may be a federal tax on unearned income for dependent children which should be analyzed separately. Roth IRAs have additional benefits in that all appreciation within a Roth IRA account is never taxed, as long as certain criteria are met. There is great value in saving at a young age and allowing for compounded interest.
An alternative to the Roth IRA would be the traditional IRA. The same amount can be funded as the Roth, but a child can earn up to $17,500, and avoid federal tax. The deadline to establish and fund an IRA is April 15th of the following year. We can assist you in determining which type of IRA contribution is optimal.
For parents that own their own businesses, they may consider hiring their children. If your child is under age 18 and you have a sole proprietorship or partnership in which each partner is a parent of the child, the child’s wages are exempt from Social Security and Medicare taxes. Corporations have no special tax breaks for hiring children - for tax purposes they are treated the same as every employee.
Income tax withholding is required of all employees, regardless of age. However, if your child earns less than the $12,000 standard deduction amount, there will be no federal tax due. Once your child begins working, they will be required to fill out Form W-4 so the appropriate amount of federal withholdings will be deducted from their pay.
There are so many benefits to summer employment. I encourage you to help your children make the most of this experience to help set them on the path to making positive financial decisions during their lifetimes.
If you have any questions, please contact us.