Tax Benefits When You Hire Your Child for a Summer Job

Posted on June 6, 2025
by Brady Ramsay

With summer fast approaching, you might be considering hiring young people at your small business. If your children are also looking to earn some extra money, why not put them on the payroll? This move can help you save on family income and payroll taxes, making it a win-win situation for everyone. Keep reading to learn about three tax benefits when you hire your child for a summer job.

You Can Transfer Business Earnings

Turn some of your high-taxed income into tax-free or low-taxed income by shifting some business earnings to a child as wages for services performed. For your business to deduct the wages as a business expense, the work done by the child must be legitimate. In addition, the child’s salary must be reasonable. (Keep detailed records to substantiate the hours worked and the duties performed.)

For example, suppose you’re a sole proprietor in the 37 percent tax bracket. You hire your 17-year-old daughter to help with office work full-time in the summer and part-time in the fall. She earns $10,000 during the year (and doesn’t have other earnings). You can save $3,700 (37 percent of $10,000) in income taxes at no tax cost to your daughter, who can use her $15,000 standard deduction for 2025 (for single filers) to shelter her earnings.

Family taxes are cut even if your daughter’s earnings exceed her standard deduction. That’s because the unsheltered earnings will be taxed to her beginning at a 10 percent rate instead of being taxed at your higher rate.

You May Be Able to Save Social Security Tax

If your business isn’t incorporated, you can also save some Social Security tax by shifting some of your earnings to your child. That’s because services performed by a child under age 18 while employed by a parent aren’t considered employment for FICA tax purposes.

A similar but more liberal exemption applies for FUTA (unemployment) tax, which exempts earnings paid to a child under age 21 employed by a parent. The FICA and FUTA exemptions also apply if a child is employed by a partnership consisting only of his or her parents.

Note: There’s no FICA or FUTA exemption for employing a child if your business is incorporated or is a partnership that includes non-parent partners. However, there’s no extra cost to your business if you’re paying a child for work you’d pay someone else to do.

Your Child Can Save for Retirement

Your business also may be able to provide your child with retirement savings, depending on your plan and how it defines qualifying employees. For example, if you have an SEP plan, a contribution can be made for up to 25 percent of your child’s earnings (not to exceed $70,000 for 2025).

Your child can also contribute some or all of his or her wages to a traditional or Roth IRA. For the 2025 tax year, your child can contribute the lesser of:

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

Keep in mind that traditional IRA withdrawals taken before age 59½ may be hit with a 10 percent early withdrawal penalty tax unless an exception applies. (Several exceptions exist, including to pay for qualified higher-education expenses and up to $10,000 in qualified first-time homebuyer costs.)

Benefits Beyond Taxes

In addition to the tax benefits of hiring your child for a summer job, there are nontax advantages. Your son or daughter will better understand your business, earn extra spending money, and learn responsibility.

If you have any questions about the tax rules in your situation, contact the business tax professionals at Ramsay & Associates. Keep in mind that some of the rules about employing children may change from year to year and may require your income-shifting strategies to change, too.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

If You’re Single with No Kids, Estate Planning is Still Important

Posted on May 6, 2025
by Brady Ramsay

Estate planning isn’t solely about passing assets on to direct descendants; it’s about taking control of your future. Even if you’re single and have no children, having an estate plan helps ensure your final wishes are clearly documented and respected.

Without a formal estate plan, state laws will determine how your assets are distributed, and those default decisions might not align with your values or desires. Whether they’re your financial investments or personal assets, a comprehensive estate plan allows you to specify exactly who should receive what, be they close friends, extended family, or even charitable organizations. So, if you’re single with no kids, estate planning is still important. Keep reading to find out why.

Without a Will, Who Will Receive Your Assets?

For single people, it’s critical to execute a will that specifies how and to whom their assets should be distributed when they die. Although certain types of assets can pass to your intended recipient(s) through beneficiary designations, absent a will, many types of assets will pass through the laws of intestate succession.

Those laws vary from state to state but generally provide for assets to go to the deceased person’s spouse or children. For example, the law might provide that if someone dies intestate, half of the estate goes to his or her spouse and half goes to the children. However, if you’re single with no children, these laws set out rules for distributing your assets to your closest relatives, such as your parents or siblings. Or, if you have no living relatives, your assets may go to the state.

By preparing a will, you can ensure your assets are distributed according to your wishes, whether that’s to family, friends, or charitable organizations.

Who Will Handle Your Finances If You Become Incapacitated?

Consider signing a durable power of attorney that appoints someone you trust to manage your investments, pay bills, file tax returns, and otherwise make financial decisions should you become incapacitated. Although the law varies from state to state, typically, without a power of attorney, a court will appoint someone to make those decisions on your behalf. Not only will you have no say in who the court appoints, but the process can be costly and time consuming.

Who Will Make Medical Decisions on Your Behalf?

You should prepare a living will, a health care directive (also known as a medical power of attorney), or both. This will ensure your wishes regarding medical care—particularly resuscitation and other lifesaving measures—will be carried out in the event that you’re incapacitated. These documents can also appoint someone you trust to make medical decisions that aren’t expressly addressed.

Without such instructions, the laws in some states allow a spouse, children, or other “surrogates” to make those decisions. In the absence of a suitable surrogate, or in states without such a law, medical decisions are generally left to the judgment of health care professionals or court-appointed guardians.

Strategies to Reduce Gift and Estate Taxes

When it comes to taxes, married couples have some big advantages. For example, they can use both of their federal gift and estate tax exemptions (currently, $13.99 million per person) to transfer assets to their loved ones tax-free. Also, the marital deduction allows spouses to transfer an unlimited amount of property to each other—either during life or at death—without triggering immediate gift or estate tax liabilities.

For single people with substantial estates, it’s important to consider employing trusts and other estate planning techniques to avoid, or at least defer, gift and estate taxes.

Creating an Estate Plan

Finally, planning ahead can help avoid potential complications in the future. Unexpected events can lead to family disputes if there’s no clear guidance on how your affairs should be handled.

That’s why estate planning is important. With a plan in place, your personal wishes are followed precisely, ensuring that your legacy—whether it includes contributions to a cause you believe in or support for a family member—is preserved exactly as you intend.

Need help creating an estate plan? The tax professionals at Ramsay & Associates can help. Contact us if you’re single, have no children, and have no estate plan. We can help draft one that’s best suited for you.

About the author

How to Manage the Limit on the Business Interest Expense Deduction

Posted on April 8, 2025
by Brady Ramsay

Prior to the enactment of the Tax Cuts and Jobs Act (TCJA), businesses were able to claim a tax deduction for most business-related interest expense. The TCJA created Section 163(j), which generally limits deductions of business interest, with certain exceptions.

If your business has significant interest expense, it’s important to understand the impact of the deduction limit on your tax bill. The good news is there may be ways to soften the tax bite in 2025. Keep reading for tips on how to manage the limit on the business interest expense deduction.

Details on Business Interest Deductions

Unless your company is exempt from Sec. 163(j), your maximum business interest deduction for the tax year equals the sum of:

30 percent of your company’s adjusted taxable income (ATI),
Your company’s business interest income, if any, and
Your company’s floor plan financing interest, if any.

Assuming your company doesn’t have significant business interest income or floor plan financing interest expense, the deduction limitation is roughly equal to 30 percent of ATI.

Your company’s ATI is its taxable income, excluding:

Nonbusiness income, gain, deduction or loss,
Business interest income or expense,
Net operating loss deductions, and
The 20 percent qualified business income deduction for pass-through entities.

When Sec. 163(j) first became law, ATI was computed without regard to depreciation, amortization, or depletion. But for tax years beginning after 2021, those items are subtracted in calculating ATI, shrinking business interest deductions for companies with significant depreciable assets.

Deductions disallowed under Sec. 163(j) may be carried forward indefinitely and treated as business interest expense paid or accrued in future tax years. In subsequent tax years, the carryforward amount is applied as if it were incurred in that year, and the limitation for that year will determine how much of the disallowed interest can be deducted. There are special rules for applying the deduction limit to pass-through entities, such as partnerships, S corporations, and limited liability companies that are treated as partnerships for tax purposes.

Small businesses are exempt from the business interest deduction limit. These are businesses whose average annual gross receipts for the preceding three tax years don’t exceed a certain threshold. (There’s an exception if the business is treated as a “tax shelter.”) To prevent larger businesses from splitting themselves into small entities to qualify for the exemption, certain related businesses must aggregate their gross receipts for purposes of the threshold.

Ways to Avoid the Limit

Some real estate and farming businesses can opt out of the business interest deduction limit and therefore avoid it or at least reduce its impact. Real estate businesses include those that engage in real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage.

Remember that opting out of the interest deduction limit comes at a cost. If you do so, you must reduce depreciation deductions for certain business property by using longer recovery periods. To determine whether opting out will benefit your business, you’ll need to weigh the tax benefit of unlimited interest deductions against the tax cost of lower depreciation deductions. We can help with that.

Another tax-reduction strategy is capitalizing interest expense. Capitalized interest isn’t treated as interest for purposes of the Sec. 163(j) deduction limit. The tax code allows businesses to capitalize certain overhead costs, including interest, related to the acquisition or production of property.

Interest capitalized to equipment or other fixed assets can be recovered over time through depreciation, while interest capitalized to inventory can be deducted as part of the cost of goods sold. We can crunch the numbers to determine which strategy would provide a better tax advantage for your business.

You may also be able to mitigate the impact of the deduction limit by reducing your interest expense. For example, you might rely more on equity than debt to finance your business or pay down debts when possible. Or you could generate interest income (for example, by extending credit to customers) to offset some interest expense.

Weigh Your Tax Options

Unfortunately, the business interest deduction limitation isn’t one of the many provisions of the Tax Cuts and Jobs Act scheduled to expire at the end of 2025. But it’s possible that Congress could act to repeal the limitation or alleviate its impact. If your company is affected by the business interest deduction limitation, contact us to discuss the impact on your tax bill. The business tax professionals at Ramsay & Associates can help assess what’s right for your situation.

About the author

Smart Strategies for a Secure Retirement

Posted on March 6, 2025
by Brady Ramsay

Saving for retirement is a crucial financial goal, and a 401(k) plan is one of the most effective tools for achieving it. If your employer offers a 401(k) or Roth 401(k), contributing as much as possible to the plan in 2025 is a good way to build a considerable nest egg. Keep reading as we discuss these options and smart strategies for a secure retirement.

Contribute More, Save More

If you’re not already contributing the maximum allowed, consider increasing your contribution in 2025. Because of tax-deferred compounding (tax-free in the case of Roth accounts), boosting contributions can have a significant impact on the amount of money you’ll have in retirement.

With a 401(k), an employee elects to have a certain amount of pay deferred and contributed to the plan by an employer on his or her behalf. The amounts are indexed for inflation each year, and they’re increasing a modest amount. The contribution limit in 2025 is $23,500 (up from $23,000 in 2024). Employees who are 50 or older by year end are also generally permitted to make additional “catch-up” contributions of $7,500 in 2025 (unchanged from 2024). This means those 50 or older can generally save up to $31,000 in 2025 (up from $30,500 in 2024).

However, under a law change that goes into effect this year, 401(k) plan participants of certain ages can save more. The catch-up contribution amount for those who are 60, 61, 62, or 63 in 2025 is $11,250.

Note: The contribution amounts for 401(k)s also apply to 403(b)s and 457 plans.

Traditional 401(k)

A traditional 401(k) offers many benefits, including:

Pretax contributions, which reduce your modified adjusted gross income (MAGI) and can help you reduce or avoid exposure to the 3.8 percent net investment income tax.
Plan assets that can grow tax-deferred — meaning you pay no income tax until you take distributions.
The option for your employer to match some or all of your contributions pretax.

If you already have a 401(k) plan, look at your contributions. In 2025, try to increase your contribution rate to get as close to the $23,500 limit (with any extra eligible catch-up amount) as you can afford. Of course, the taxes on your paycheck will be reduced because the contributions are pretax.

Roth 401(k)

Your employer may also offer a Roth option in its 401(k) plans. If so, you can designate some or all of your contributions as Roth contributions. While such amounts don’t reduce your current MAGI, qualified distributions will be tax-free.

Roth 401(k) contributions may be especially beneficial for higher-income earners because they can’t contribute to a Roth IRA. That’s because the ability to make a Roth IRA contribution is reduced or eliminated if adjusted gross income (AGI) exceeds specific amounts.

Planning for the Future

If you have questions about smart strategies for a secure retirement, feel free to contact us. The tax professionals at Ramsay & Associates can help you determine how much to contribute or the best mix between traditional and Roth 401(k) contributions. We can also discuss other tax and retirement-saving strategies for your situation.

About the author

How Tax-Smart HSAs Can Benefit Your Small Business and Employees

Posted on January 30, 2025
by Brady Ramsay

As a small business owner, managing health care costs for yourself and your employees can be challenging. One effective tool to consider adding is a Health Savings Account (HSA). HSAs offer a range of benefits that can help you save on health care expenses while providing valuable tax advantages. You may already have an HSA. Now is a good time to review how these accounts work because the IRS has announced the relevant inflation-adjusted amounts for 2025. Keep reading to learn more about those amounts and how tax-smart HSAs can benefit your small business and employees.

Basic HSA Tax Benefits

For eligible individuals, HSAs offer a tax-advantaged way to set aside funds (or have their employers do so) to meet future medical needs. Employees can’t be enrolled in Medicare or claimed on someone else’s tax return.

Here are the key tax benefits:

Contributions that participants make to an HSA are deductible, within limits.
Contributions that employers make aren’t taxed to participants.
Earnings on the funds within an HSA aren’t taxed, so the money can accumulate tax-free year after year.
HSA distributions to cover qualified medical expenses aren’t taxed.
Employers don’t have to pay payroll taxes on HSA contributions made by employees through payroll deductions.

Key 2024 and 2025 Amounts

To be eligible for an HSA, an individual must be covered by a “high-deductible health plan.” For 2025, a high-deductible health plan has an annual deductible of at least $1,650 for self-only coverage or at least $3,300 for family coverage.

For self-only coverage, the 2025 limit on deductible contributions is $4,300. For family coverage, the 2025 limit on deductible contributions is $8,550. Additionally, annual out-of-pocket expenses for covered benefits can’t exceed $8,300 for self-only coverage or $16,600 for family coverage.

An individual (and the individual’s covered spouse, as well) who has reached age 55 before the close of the tax year (and is an eligible HSA contributor) may make additional “catch-up” contributions for 2025 of up to $1,000.

Making Contributions for Your Employees

If an employer contributes to the HSA of an eligible individual, the employer’s contribution is treated as employer-provided coverage for medical expenses under an accident or health plan. It is excludable from an employee’s gross income up to the deduction limitation. There’s no “use-it-or-lose-it” provision, so funds can build for years.

An employer that decides to make contributions on its employees’ behalf must generally make similar contributions to the HSAs of all comparable participating employees for that calendar year. If the employer doesn’t make similar contributions, the employer is subject to a 35 percent tax on the aggregate amount contributed by the employer to HSAs for that period.

Using HSA Funds for Medical Expenses

Your employees can take HSA distributions to pay for qualified medical expenses. This generally means expenses that would qualify for the medical expense itemized deduction. They include costs for doctors’ visits, prescriptions, chiropractic care, and premiums for long-term care insurance.

The withdrawal is taxable if funds are withdrawn from the HSA for any other reason. Additionally, an extra 20 percent tax will apply to the withdrawal unless it’s made after age 65 or in the case of death or disability.

We Are Here to Help

As you can see, tax-smart HSAs can benefit your small business and employees by offering a flexible option for providing health care coverage. But the rules are somewhat complex. If you have questions, the business tax professionals at Ramsay & Associates are here to help. Contact us if you’d like to discuss offering this benefit to your employees.

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