For any students or others who have summer jobs, there are some nice tax planning moves that can made now to maximize the tax effects of the employment. First, all workers should consider putting as much money into their IRA each year as is allowed by law. For 2010, any worker can contribute up to $5,000 to an IRA. The amount cannot exceed the total amount of wages earned, so if a worker earned $3,000 this year, the maximum contribution would be $3,000 instead of $5,000. If a 16 year-old worker earned at least $5,000 this year and contributed $5,000 to a Roth IRA, he or she would have $217,000 by age 65 and $319,000 by Age 70, assuming an annual return of 8%. These funds could be removed tax free at that time. Of course, the numbers will be much higher if future contributions are made, as these numbers represent the earnings on one $5,000 contribution.
The other nice tax planning move is that no income taxes are due and owing on the first $5,700 of wages, assuming no other income (earned or investment/passive) is actually taxable this year. We will have an article on full tax planning for hiring your children in the next issue, but please remember that no payroll taxes are due on wages paid to your children if your business is a sole proprietorship or a husband-wife partnership and your child is under Age 18. This also includes the federal unemployment tax (FUTA), in addition to the FICA and Medicare taxes.