How Do the Kiddie Tax Rules Apply to Hiring My Children?
The IRS’ Kiddie Tax Rules only applies to unearned or portfolio income. Paying your children would be earned income, so the Kiddie Tax rules do not apply.
What are the Kiddie Tax Rules?
The Kiddie Tax is a series of provisions that determine how unearned (portfolio) income of people under age 19 is taxed. The Kiddie Tax was overhauled in the Tax Cuts and Jobs Act (TCJA) enacted late in 2017. For many years the investment income of youngsters (over a certain amount) was taxed at their parents’ highest marginal tax rate. The TCJA changed the rules for 2018 and later years so that the unearned income of youngsters was taxed without reference to their parents’ tax rates. Instead, youngsters used the tax table for trusts and estates.
One of the problems with the TCJA rules was that the trusts and estates tax table gets to the highest tax rate much faster than the tax tables for other taxpayers. The change increased the income taxes on many youngsters.