guest commentary by David Potts
Potts is a certified public accountant with more than 25 years experience (Although every effort is made to provide you accurate and timely tax information, it is general in nature and not specific to your facts and circumstances. Consult a qualified tax professional to discuss your particular case.)
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Work is a worthwhile endeavor. Hard work is what made the United States of America the world’s greatest economic power.
By hard work, I don’t mean just brute force. It’s hard work, at least for most of us, to complete college with excellent grades. It’s hard work to raise your children and make sure they are healthy and successful in school (as opposed to successful at playing Nintendo or watching television).
It is hard work to design an office building as well as to provide the physical labor to construct the building. But I worry at times the work ethic that made the United States great is diminishing.
Now granted, President Richard Nixon whined about the decline of the work ethic and that it was being replaced by the welfare ethic way back in 1972. Fear that the work ethic is under siege has been around for some time. It just might be my time in life to complain how the world is going to hell in a handbasket and to reminisce about the good ole days. After all, lazy people have always been with us.
Back in the Old Testament days, they were passing along proverbs such as “One who is slack in his work is brother to one who destroys.” But I think it is more than just me seeing a few lazy people and generalizing the decline of the work ethic to the general population.
Earlier this year a book titled “Coming Apart: The State of White America, 1960-2010” by Charles Murray was released. The theme of Murray’s book is that America is not divided as much by race as it is by class. His book is based on his analysis of white America. One of his findings was that back in the 1960’s almost every man had a job or was looking for a job. Today, according to Murray, approximately 1 in 8 men in the working class demographic don’t want to work, won’t look for jobs, and some feign disability to get out of work. Doesn’t that demographic disturb you?
Even the government seems to discourage work. There is nothing more iconic of the American work ethic than the family farm. People raised on farms will tell you they learned to work hard when they were children by performing farm chores.
But recently, the Department of Labor proposed regulations that would prevent farm family members under the age of 18 from performing many farm chores. There were enough public outcries to cause the Department of Labor to reverse their position, but the philosophy opposing hard work seems to be supported by our Department of Labor.
I’m betting most if not all of The City Wire readers have a strong work ethic and understand that it’s generally up to parents to teach their children the importance of hard work. And if you are fortunate to have a family farm or small business, working your children in the family business is a great way to teach them the value of work. (Now, just for clarification, I’m not promoting sweat shops or the abuse of children. I am assuming people reading this article love their children and know what work would be appropriate based on their age and physical abilities. If not, seek professional help.)
Although the Department of Labor may have leaders opposed to work, the Department of the Treasury has a law that benefits family farms and businesses that work their children.
Everybody that works a job for pay should be familiar with the FICA tax, often referred to as the Social Security tax. There are two portions to the FICA tax: the employee’s portion and the employer’s portion. The employee must pay into the U.S. Treasury 5.65% of his gross pay as FICA tax and the employer must pay 7.65% into the U.S. Treasury on behalf of the employee. The law that benefits the family farm or business is that the FICA tax does not apply to “service performed by a child less than 18 years of age in the employ of his father or mother.”
Combine the family exemption from FICA tax with the fact that a dependent child can earn up to the standard deduction without paying any income tax ($5,950 in 2012) and each child is a potential tax shelter. For example, if you as the parent are in a 15% income tax bracket and pays self-employment of 13.3%, each child could be worth an additional tax savings of $1,684. If you’re in a 25% tax bracket the child might be worth $2,279.
If your business operates as a corporation, the family exemption from FICA tax won’t apply. If your business operates as a partnership (or LLC taxed as a partnership) with a partner or member that is not family, the family exemption from FICA tax won’t apply. You have to operate as a proprietor or family partnership to qualify for the family exemption from FICA tax. And you will have to file employment tax returns and prepare W2s. Note I am only saying the family exemption from the FICA tax won’t apply. The income tax portion of the tax savings when working a child will apply no matter what the business structure.
If you want your children to succeed in life you should teach them the importance of hard work. It is more important for success than intelligence; it is more important for success than talent. And if you operate a family farm or business, the IRS will subsidize this lesson in work ethics.