Hiring Your Child for Modeling or Acting?
Every year I have clients ask me about different tax strategies, we go over the garden variety HSAs, retirement plans, deferred comp….all old news. What I don’t always talk about are the tax incentives behind hiring family members. Why not? First, not everyone has children as more people live childless (by choice or not is not something anyone should judge). However, if you do have a child and decide to hire them as a model or for them to display their adorableness in an ad for your business you will want to be aware of a few things.
Here are the important parts:
If you are paying for image rights, this is considered passive royalty income and is not eligible for IRA contributions because it’s not earned income.
The income is still subject to self-employment tax.
Pay must be reasonable.
Make sure you comply with Coogan Laws if you are in California, New York, Illinois, Louisiana, or New Mexico. Other states have similar laws.
The Wrong Type of Income
If you are paying your child for image rights, it’s likey to be considered “passive” income. Thus, it cannot be used to document income needed to contribute to a Roth IRA. I would speculate this has a better chance of being “earned income” if the child is a model for more than just your business and has a track record of earnings as a model or is employed by a modeling agency.
Further Reading: Topic no. 451, Individual retirement arrangements (IRAs)
Self Employment Tax
In the United States, self-employment tax is 15.3%. This represents 12.4% for Social Security and 2.9% for Medicare. This is in addition to any local, state, federal, or international taxes you might owe depending on your citizenship, where the job took place, and where you live. This is tantamount to your child being employed at an outside employer and paying what they would normally pay on payroll taxes plus the company’s share of payroll taxes.
Further Reading: IRS Self-Employment Taxes
Pay must be reasonable
If you are paying your child for acting or modeling, you will want to find the “going rate”. According to Backstage and Ziprecruiter, that’s anywhere from $100 to several thousand dollars per job. I highly advise working with a CPA on this. You will want to set a reasonable wage to avoid scrutiny from the IRS. Remember: tax court is “guilty until proven innocent”. My point is, don’t count on shifting $100,000 of income to your child because they took a few photos for your business (if they are well known or a “star” that might be different….but they need to be a star in the eyes of the IRS, not just yous).
Further Reading: Backstage: How to get your child into modeling
What are Coogan Laws?
Charlie Chaplin and Jackie Coogan in "The Kid".
Coogan Laws are a set of laws in place in certain states where 15% of earned income from a child actor or model is funneled into a trust for the child which is turned over to them when they become an adult. You will also need to fill out a trust tax filing and the income is subject to trust tax rates. Both parents must open a trust account where funds can be monitored, but not withdrawn. The idea behind these laws is the child’s funds cannot be mishandled before the child can manage the funds themselves.
Coogan laws were put in place to prevent the exploitation and mismanagement of child actor funds after renowned child actor, Jackie Coogan was forced to sue his mother and stepfather after he discovered they had stolen between $3 million and $4 million. He only recovered a very small portion and lived in financial hardship.
Further Reading: Coogan Law: How It Works & What Is a Coogan Account (Wrapbook) | At present, Coogan Accounts (a.k.a Blocked Trust Accounts and Trust Accounts) are required by the State of California, New York, Illinois, Louisiana and New Mexico. | BizParents Louisiana Laws
This is not tax advice, speak with a qualified tax professional before acting upon anything discussed here.
