Planning for Your Summer Help: Legal and Tax Issues

Many small businesses take on additional help during the summer months. Some use seasonal workers to fill gaps created when full-time employees go on vacation. Others need workers for their summer-related activities of their businesses (e.g., concessions at entertainment sites such as miniature golf). Still others use college students with the idea of extending to them offers of permanent jobs after graduation. Whatever your need, or your reason for hiring, be sure to understand the legal and tax ramifications of your actions.

Summer interns

Some businesses seek to use unpaid interns. As a general rule, you can’t get free help from college students; it’s against the law. According to the U.S. Department of Labor, you can only use unpaid interns if you meet all of the following conditions:

1. The internship, even though it includes actual operation of your facilities, is similar to training which would be given in an educational environment;
2. The internship experience is for the benefit of the intern;
3. The intern does not displace regular employees, but works under close supervision of existing staff;
4. By providing the training you derive no immediate advantage from the activities of the intern; and on occasion your operations may actually be impeded;
5. The intern is not necessarily entitled to a job at the conclusion of the internship; and
6. You and the intern understand that the intern is not entitled to wages for the time spent in the internship.

Be sure to set compensation as dictated by the marketplace, your budget, and the law. Observe minimum wage rules in your state.

Putting your child on the payroll

It can be beneficial to you and your child to employ him/her during the summer break. The benefits to your child:

• Gain work experience. Giving your child job responsibilities is real-life work experience.
• Earn income. A child can earn up to $6, 350 in 2017 tax free.
• Save on taxes. A child under age 18 who works for a parent who is a sole proprietor or in a partnership where the only parents are the child’s parents does not pay Social Security and Medicare (FICA) taxes.
• Save for retirement. A child can use earnings to fund an IRA, Roth IRA, or myRA. In fact the child can save or spend the earnings and a parent, or grandparent, can contribute to the child’s retirement account based on the child’s earnings. The maximum contribution is the lesser of the child’s earnings or $5, 500.

The benefits to you:

• Receive help in your business. Many small businesses are family businesses, so hiring your child is a way to groom him or her for greater responsibilities in your company later on.
• Deduct compensation. You can deduct compensation paid to your child as long as it is reasonable for the work performed. Keep track of the child’s hours and services performed.
• Save on employment taxes. As mentioned earlier, your child’s wages may be free from FICA taxes. They are also exempt from FUTA (federal unemployment tax) if the child is under age 21 and your business is a sole proprietorship, or partnership where the only partners are the child’s parents.

Tax credit for hiring certain workers

You may qualify for the work opportunity tax credit for hiring “summer youth” employee. This is a person age 16 to 17 who lives in a federally-designated empowerment zone. Other conditions for claiming the credit:

• The youth must not be related to you.
• The youth must not have worked for you last year.
• The employment must run between May 1 and September 1 (the youth can work longer, but only wages between these dates are counted for the credit).
• You and the worker must sign Form 8850, which is submitted to your state workforce agency within 28 days of the first day of employment. The agency certifies the youth’s eligibility for you to take the credit.

The amount of the credit is up to $1, 200. This is 40% of wages up to $3, 000, provided the youth worked at least 400 hours for you. More details about the credit can be found in the instructions to Form 5884 and in the DOL’s Employer’s Guide to the Work Opportunity Tax Credit.

Conclusion

The clock is ticking on your window of opportunity to plan for hiring this summer. The Spring semester at many colleges ends the first week in May. Small employers will be competing with large corporations for talented students for summer employment, so starting early to line up summer employees can be helpful. Reach out to local colleges through their student employment offices.