Hiring your child to work for your family business opens the door to potential tax savings for both you and your child. Paying your child a salary allows you to deduct their wages as a business expense, reducing the business’ taxable income. Meanwhile, your child can earn up to the standard deduction amount tax-free. The two-way tax break can make this a solid win for parent-employer as well as child-employee. As is usually the case with taxes, some rules have to be followed for this to work. A financial advisor can help determine if hiring your child as an employee makes sense for your personal tax situation and small business needs.
Family Employees and Taxes
Tax regulations offer attractive tax benefits to owners of small businesses who hire their children to work for the family firm. The child’s earnings are also likely to qualify for favorable tax treatment.
As a small business owner, you can pay each child you hire up to $13,850 in 2023 (and $14,600 in 2024) without them owing any federal income tax. That’s because this amount matches the standard deduction for single filers. Your business also gets to deduct your child’s wages as a business expense.
You can’t just hand your kid cash and claim it as a deduction, however. The IRS requires you follow rules to make the most of this tax play. To properly hire your child and unlock tax savings, keep these guidelines in mind:
- Give them an actual job. Your child must perform necessary work related to your business. Personal tasks like mowing your lawn don’t count.
- Make sure the work suits the child as well. Paying a 16-year-old to sweep out the warehouse is credible, but claiming a kindergartner is keeping the business’s books is not.
- Pay reasonable wages. Compensate your child fairly, as you would any non-relative employee. The IRS may flag excessive pay.
- Follow employment laws. Treat your child like any other employee when it comes to tax withholding, forms filing and more.
- Keep good records. Carefully document hours worked, pay received and taxes paid.
- Consider tax implications. Your child’s pay may or may not be subject to Social Security, Medicare and unemployment taxes based on their age and your business structure.
As long as you closely follow the rules, the IRS lets your business deduct your child’s pay. Your child, meanwhile, can earn up to the standard deduction tax-free.
Hiring Your Child in Action
An example may clarify how this could work in practice. Say you run a small social media consulting business as a sole proprietorship. You decide to hire your 16-year-old daughter to manage your company Instagram account for $12 per hour. She works 10 hours per week for 12 weeks during the summer, earning $1,200 total.
You pay her wages and get to deduct the $1,200 on your business tax return. You withhold income tax from her paychecks, but that pay is not subject to Social Security or Medicare taxes since she’s under 18.
At tax time, your daughter files her own tax return. If you don’t claim her as a dependent, she can take the standard deduction for single filers. If she is a dependent for tax purposes, she can claim a standard deduction of $1,250 or her earned income plus $400, up to the full standard deduction for single filers. This protects her $1,200 in wages from any federal income tax.
By properly hiring your minor child, you save 7.65% in payroll taxes (Social Security and Medicare). On $1,200, that comes to $91.80. Your child, meanwhile, saves 10% of $1,200, or $120, in federal income taxes. Similarly, the more she earns from working for your business, the greater her tax savings, up to the standard deduction amount.
Restrictions on Hiring a Child
While hiring your child can be a financial winner, this is not a solution suitable for every taxpayer. If you are considering it, keep these limitations in mind:
- You need self-employment or business income to qualify for the deduction. It won’t work for wage earners.
- Your child must be under age 18 for wages to be exempt from Social Security and Medicare taxes.
- Once your child reaches age 21, you have to pay federal unemployment taxes on their wages.
- The IRS may flag high pay rates for children as unreasonable if it exceeds the norm for their duties.
- You and your child must follow all documentation and reporting requirements. Failing to do so could nullify the tax benefits and possibly incur IRS penalties.
The IRS is not likely to give you much leeway if you violate these rules. But the requirements are not particularly burdensome and tax savings can be substantial if everything is done correctly
When done right, hiring your child to work for your company can legally benefit you both come tax time. Just be sure to dot your i’s and cross your t’s by following employment laws and IRS rules. Report the earnings as required and, if any taxes are due, pay them in full. Most importantly, make sure your child takes on real duties vital to your business success and is paid a fair wage.
Tax Planning Tips
- If hiring your child seems like something you want to consider, meet with a financial advisor to ensure you fully understand the requirements before moving forward. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- SmartAsset’s Income Tax Calculator gives you a quick and easy way to estimate how much you will owe in federal, state and local taxes.
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