Get Those Kids a Job, and Take Advantage of Tax Breaks

Article Highlights

  • Higher Standard Deduction
  • IRA Options
  • Self-Employed Parent
  • Employing Your Child
  • Tax Benefits

Children who are dependents of their parents are subject to what is commonly referred to as the kiddie tax. This generally applies to children under the age of 19, or full-time students between the ages of 18 and 24.

The kiddie tax was enacted as part of the Tax Reform Act of 1986 to close a tax loophole where parents would put their investments under their child’s name and social security number so that their investment income would be taxed at a lower rate.  The kiddie tax declared that unearned income (investment income) in excess of a minimum amount was to be taxed at the parent’s highest marginal tax rate. As a result, children are taxed at fiduciary income tax rates, which generally amount to higher taxes on unearned income.

The tax reform legislation enacted in 2017 changed the way children are taxed by no longer having the children’s unearned income taxed at the parent’s top marginal tax rate. Instead, children are taxed at fiduciary income tax rates, which generally result in higher taxes on unearned income.

Tax-Free Income – On the bright side, a child’s earned income (income from working) is taxed at single rates, and tax reform just about doubled the standard deduction for singles. The standard deduction is $12,200 for 2019. This means that your child can make $12,200 from working and pay no income tax (but will be subject to Social Security and Medicare payroll taxes). If the child is willing to contribute to a traditional IRA, for which the 2019 contribution cap is $6,000, the child can make $18,200 from working—federal income tax free.

IRA Contributions – If your child is reluctant to give up any of their hard-earned money from their summer or regular employment, the amount of an IRA contribution could be gifted to the child. If you, a grandparent, or others have the financial resources, this ‘gift’ would give your child a great start toward their retirement savings.

Roth IRAs are a better alternative. Unlike traditional IRAs, they provide tax free income at retirement. However, the contribution to a Roth is not deductible, thus income in excess of $12,200 would not be tax free. Even if the tax rate at the lower income level is only 10%, it may be worth paying a small tax to gain the tax-free retirement provided by a Roth IRA.

Employing Your Child – If you are self-employed (an unincorporated business), rather than helping support your children with your post-tax dollars, you can instead hire them to work for your business and pay them with tax-deductible dollars. Of course, the employment must be legitimate and the pay commensurate with the hours and the job worked.

Wages paid to a child under age 18 are not to be subject to FICA—Social Security and Hospital Insurance (HI, aka Medicare) taxes—since employment for FICA tax purposes doesn’t include services performed by a child under the age of 18 when employed by a parent. Thus, the child will not be required to pay the employee’s share of the FICA taxes, and the business won’t have to pay its half either. In addition, by paying the child and reducing the business’s net income, the parent’s self-employment tax that is payable on net self-employment income may also be reduced.

Example: Let’s say you are in the 24% tax bracket and own an unincorporated business. You hire your child (who has no investment income) and pay the child $15,000 for the year. You reduce your income by $15,000, which saves you $3,600 in income taxes (24% of $15,000), and your child has a taxable income of $2,800 ($15,000 less the $12,200 standard deduction) on which the tax is $280 (10% of $2,800). A $2,800 contribution to your child’s traditional IRA would bring the child’s taxable income down to zero, and the child would owe no federal income tax.

By paying your child $15,000, you not only reduce your self-employment income for income tax purposes, but you reduce your self-employment tax (HI portion) by $402 (2.9% of $15,000 times the SE factor of 92.35%). However, if your net profits for the year were less than the maximum SE income ($132,900 for 2019) subject to Social Security tax, then the savings would include the 12.4% Social Security portion in addition to the 2.9% HI portion. In this case, the total SE tax savings would be $2,119.

A similar but more liberal exemption applies for FUTA, which exempts from federal unemployment tax the earnings paid to a child under age 21 while employed by his or her parent. The FICA and FUTA exemptions also apply if a child is employed by a partnership consisting solely of his or her parents. However, the exemptions do not apply to businesses that are incorporated or a partnership that includes non-parent partners. Even so, there’s no extra cost to your business if you’re paying your child for work that you would pay someone else to do anyway.

If you have questions related to your child’s employment or about hiring your child to work for your business, please contact us.

Need Advanced Time-Tracking? Connect QuickBooks Online to An App

You can track the hours employees work in QuickBooks Online. But if your time-tracking needs are complex enough, you’ll need an integrated app. 

If your company has a staff and sells services, you know better than anyone that time is money. It’s critical that you track every minute that employees work, as well as those that can be billed to customers. QuickBooks Online offers dedicated tools that let you do just those tasks.

But QuickBooks Online has limitations in that area, and you may need more versatile time-tracking than it provides. There’s a solution for that: add an integrated add-on application. Several are available that go above and beyond in the area of employee time management. If you’re interested in exploring these online solutions, we can help you find and get started with the right one.

What QuickBooks Online Can Do

QuickBooks Online has time-tracking features that are easy to set up and use – but you must be sure they’re turned on. Click the gear icon in the upper right-hand corner, then Account and Settings under Your Company. Click on the Advanced tab and go down to the Time Tracking section. The first two entries here should be checked; if they’re not, click in the boxes. If you don’t want employees to see how much customers are being billed for their time, keep that box unchecked. Change the First day of work week if necessary and click Save.


If you’re going to track hours worked by employees and bill them to customers, these two boxes need to be checked.

Once time-tracking is enabled, you’ll be able to enter single timed activities and/or fill in timesheets, marking them as billable where appropriate. Employees will be able to enter their own hours on timesheets, and billable hours can be easily transferred to customer invoices.

Adding an Add-On

As we said earlier, there are numerous advanced add-on time-tracking applications that can be integrated with QuickBooks Online. They contain built-in tools to facilitate their actual connections with QuickBooks Online, and they know what data needs to be exchanged and synchronized. Hours captured on timesheets goes directly into QuickBooks Online, which transfers billable hours to customer invoices and uses the data in job costing and payroll.

Here’s an example of how the setup process works in one of the most popular apps, TSheets. Once you’ve created an account (a 14-day free trial is available), you’ll click on the Feature Add-ons link in the lower left-hand corner, then Manage Add-ons. Select QuickBooks Online from the list and click Connect to QuickBooks. Click Connect again to establish the link. TSheets then asks some questions about your import preferences. When you’ve designated those and clicked on Start Import, TSheets will import your employees, customers, service items, and other data you’ve specified from QuickBooks Online.

You may need our assistance with one task in particular: setting up the Payroll Item Mapping Tool. This ensures that your pay types (salary, overtime, etc.) match those in QuickBooks Online. There are many other internal settings that will require your attention before you start using TSheets.

You can fine-tune your time-tracking app’s settings, as in the above image from TSheets.

Sophisticated Tools

TSheets and other QBO-friendly time-tracking applications have their own unique set of features, but they all focus on getting your employees paid for their work and your company paid by customers who use your services – accurately and in documented detail. Prices vary, but they generally charge a monthly base fee and an additional monthly fee for each user.

Employees can, for example:

  • Punch into and out of specific jobs on a virtual time clock (desktop or mobile). Facial recognition adds another layer of security.
  • Use timecards or timers to record work hours.
  • Record their breaks and time off based on the stated company policies.
  • Track time when Wi-Fi or cellular service is not available.

Managers can:

  • Access and approve timesheets from the mobile app.
  • Schedule shifts and assign employees to them.
  • See who’s working (and on what) and locate them via GPS tracking.
  • Generate real-time, live reports.

Keep in mind, when you add an app to QuickBooks Online, you essentially need to learn how to use an unfamiliar website or program. Since they both touch upon payroll and customer billing, time-tracking applications must be understood thoroughly and used with precision. If your needs go beyond what QuickBooks Online can do, please contact us and let us help you select and implement the right app for you.

Does Your Tax ID Number Need to be Renewed?

Article Highlights:

  • Expiring ITINs
  • IRS Currently Accepting Renewal Applications
  • Family Renewal Options
  • How to Renew
  • Common Errors to Avoid

According to the Internal Revenue Service (IRS), about two million Individual Taxpayer Identification Numbers (ITINs) are set to expire at the end of 2019.

ITINs are used by people who file taxes or have payment obligations under U.S. law, but who are not eligible for a Social Security number. ITIN holders who have questions can visit the ITIN information page on the IRS website.

Any ITIN that has not been used on a federal tax return at least once in the last three consecutive years will expire on Dec. 31, 2019. In addition, ITINs with middle digits 83, 84, 85, 86 or 87 that have not already been renewed will also expire at the end of the year. ITINs with middle digits of 70 through 82 expired in past years. Taxpayers with these ITIN numbers who have not already renewed their ITIN can renew at any time. Note: It is important to understand that ITINs with middle digits 83 through 87 will expire regardless if they were used for filing returns in the last three years.

The IRS is currently accepting ITIN renewal applications – Taxpayers whose ITIN is expiring and who need to file a tax return in 2020 must submit a renewal application. Federal returns that are submitted in 2020 with an expired ITIN will be processed. However, exemptions and/or certain tax credits will be disallowed, and the taxpayers will be notified by mail advising them to renew their ITIN. Once the ITIN is renewed, any applicable exemptions and credits will be reinstated, and any applicable refunds will be issued. Therefore, renewing early will avoid these last-minute hassles and delays in receiving refunds.

Family renewal option – Taxpayers with an ITIN containing middle digits 83, 84, 85, 86 or 87, as well as all previously expired ITINs, have the option to renew ITINs for their entire family at the same time. Those who have received a renewal letter from the IRS can choose to renew the family’s ITINs together, even if family members have an ITIN with middle digits that have not been identified for expiration. Family members include the tax filer, spouse and any dependents claimed on the tax return.

How to renew an ITIN – To renew an ITIN, a taxpayer must complete a Form W-7 and submit all required documentation. Taxpayers submitting a Form W-7 to renew their ITIN are not required to attach a federal tax return. However, taxpayers must still note a reason why they need an ITIN on the Form W-7. See the Form W-7 instructions for detailed information. An application package can be submitted in one of three ways:

  1. By mail, along with original identification documents or copies certified by the agency that issued them, to the IRS address listed on the Form W-7 instructions. The IRS will review the identification documents and return them within 60 days.
  2. Work with Certified Acceptance Agents (CAAs) authorized by the IRS to help taxpayers apply for an ITIN. CAAs can authenticate all identification documents for primary and secondary taxpayers. They can also verify that an ITIN application is correct before submitting it to the IRS for processing and authenticate the passports and birth certificates for dependents. This saves taxpayers from mailing original documents to the IRS.
  3. In advance, call and make an appointment at a designated IRS Taxpayer Assistance Center to have each applicant’s identity authenticated in person instead of mailing original identification documents to the IRS. Each family member applying for an ITIN or renewal must be present at the appointment and must have a completed Form W-7 and required identification documents. See the TAC ITIN authentication page on the IRS website for more details.

Common errors to avoid – There are several common errors that can slow down ITIN renewal applications:

  • Mailing identification documentations without a Form W-7
  • Missing information on the Form W-7
  • Insufficient supporting documentation, such as U.S. residency documentation or official documentation to support name changes.
  • The IRS no longer accepts passports that do not have a date of entry into the U.S. as a stand-alone identification document for dependents from a country other than Canada or Mexico, or dependents of U.S. military personnel overseas. A dependent’s passport must have a date of entry stamp, otherwise the following additional documents to prove U.S. residency are required:
    • U.S. medical records for dependents under age 6,
    • U.S. school records for dependents under age 18, and
    • U.S. school records (if a student), rental statements, bank statements or utility bills listing the applicant’s name and U.S. address, if over age 18.

If you have questions or need assistance completing a renewal, please contact us.

What Are My Chances of Being Audited and How Can I Reduce Them?

Audits are relatively rare, as fewer than 1% of taxpayers grouped by income level will get that dreaded notice on their IRS letterhead.

Statistics show that for the average American who earned $50‒70K per year, only about half a percent of those tax returns were audited. If you made between $25‒50K or between $75‒100K, less than half a percent of those returns were under audit. Only 6.66% of tax returns reporting an eight-figure adjusted gross income were audited as well. Additionally, the IRS has less funding and about one-third fewer agents on board compared to less than a decade ago, so this keeps audit figures down.

In short, your chances are being audited by the IRS are quite slim. There are often many red flags that are likely to trigger an audit, but even then, you’re still more likely to get an examination notice than an actual field audit in which an IRS agent shows up at your door demanding to examine your workspace and files.

An IRS Letter Is Not Likely to Be an Audit

You might think that you’ve been selected for an audit because a letter from the IRS came in the mail that asked you to explain why a line item on your tax return was reported a certain way or that they computed your tax bill for you. A notice is not the same thing as an audit.

Most IRS notices are computer-generated with a “CP” prefix. Notices in the CP series will be automatically mailed to you when changes are made to your IRS account, such as making a payment or having all or part of your tax refund seized to pay down your current balance. These notices are sent with the intent to catch discrepancies and underreporting based on information they already have on file. Examples include if you forgot to report that 1099 you received for additional income, or if there was an error on your W-2.

Requests for more information are often referred to as a “desk audit,” but your contact with the IRS is still largely minimal, particularly if your notice pertains to math or input errors.

Common Audit Red Flags

Despite having a pretty low chance of ever being audited, it’s helpful to know which criteria are the most likely to trigger an audit:

  • Earning $200,000 or more per year. Don’t pass up that promotion or acting on your entrepreneurial instincts, but your chances of being audited increase once you enter the upper middle class. The higher your income, the higher the likelihood of being audited.
  • Home office deduction.  In general, self-employed professionals are far more likely to be audited than employees. But your chances increase when you take the home office deduction, even though it is a perfectly legitimate write-off. It’s not just the amount deducted, but home office deductions are subject to a “regular and exclusive use” rule that many work-at-home types inadvertently violate without realizing it.
  • Suspiciously high charitable contributions. Any larger-than-average deduction is going to arouse suspicion, but charitable contributions are a common red flag. Many people donate to causes they care about, but cash donations are easy to substantiate, as are marketable securities. Did some spring cleaning and gave a lot to Goodwill? People often overvalue non-cash donations and don’t have the time and wherewithal to take pictures and document them unless it’s an extremely valuable item, like donating rare art to a museum that had a professional appraisal.
  • Cash-intensive businesses. Consistent with the high audit rates among the self-employed, any cash-intensive type of work is an audit minefield. While rideshare drivers get a 1099 and can properly track mileage with many apps and tools, discrepancies are still common. Cash-heavy businesses like cafes, laundromats and selling items at craft fairs also provide opportunities to overstate expenses and understate income with little or no substantiation of these numbers.

You should still take advantage of all the tax benefits legally available to you and keep fastidious records you and your tax professional can easily access. This way, you can substantiate any claims if your tax filing status is more complicated than just getting a W-2 from a job. If you are ever facing an audit, either as an individual taxpayer or a small business owner, please contact us.