UPDATED FOR 2023
Hire Your Kids and Save Taxes
Engaging your children in your business operations can offer multiple benefits, both for your business's financial health and your children's personal development. Below are several compelling reasons why you should consider hiring your kids.
1. Tax Benefits
Hiring your kids in your family-owned business can provide tangible tax advantages.
- Children under the age of 18, employed in a parent-owned business, are not subject to Social Security or Medicare taxes, provided the business is a sole proprietorship or a limited partnership where both partners are parents of the child.
- You can deduct the salaries you pay your children from your business income, reducing your overall taxable profit.
- The amount you pay your child is taxed at the child’s tax rate, which is likely lower than yours if you're in a higher tax bracket.
2. Asset Transfer and Wealth Building
Another added benefit of hiring your kids is the opportunity to transfer assets. For instance, the wages you pay to your children can be deposited into a savings account under the child's name, a Coverdell Education Savings Account, or a Roth IRA, allowing parents to transfer wealth without incurring gift or estate taxes while preparing their children for future financial needs.
3. Personal Development & Skill Acquisition
Hiring your kids is an excellent way to impart essential business skills. Whether it's problem-solving, hard work, discipline, financial literacy, goal-setting, or interpersonal skills, real-world experience is invaluable. This can be beneficial for their career prospects in the long run and can foster entrepreneurial instincts.
4. Succession Planning
If your vision is to keep your business in the family for generations, introducing your children to the operations early can lay a solid foundation for succession planning. It ensures business continuity and prepares your children to step into leadership roles confidently.
It's important to keep in mind that all work and compensation must be appropriate for your child's age, skills, and the value they bring to the business. Further, all transactions should be kept professional—for instance, paying the child through regular payroll and reporting it accurately to the IRS.
In conclusion, hiring your children can offer tax advantages, enable wealth building, provide valuable life skills, and assist in succession planning. It can indeed be a strategic choice worth considering!
If you have children between the ages of 7 - 22, you can use this strategy to save some money. Here is how it works:
- Your company is able to pay each of your children an annual salary of $13,850. This is an important amount because it is the standard deduction amount for single individuals.
- Your business gets to take a deduction for the payment, thus decreasing your taxable income.
- Your children will then file their own tax return, but since they only made $13,850, they pay no federal income tax because the standard deduction of $13,850 makes their taxable income 0.
- So the business gets to take a deduction, but the kids pay no federal income tax. It does not get much easier than that!
This strategy can also be combined with IRA and 401k strategies to really maximize the benefit. For instance, if you paid each child $18K as a salary, You could put $5K into an IRA that is deductible, and you can use their standard deduction to take their taxable income to zero.
In that case, your business can deduct $18K per child, but again, there is no taxable income.
Then imagine if you substitute the 401k for the IRS, then you could get up to about $32K of salary for each of them with no taxable income. This is a very important strategy.
Hiring your own children can indeed confer certain tax advantages, but it's essential to understand the specific IRS rules and regulations to ensure the process is compliant.
When your child is doing legitimate work for your sole proprietorship or a partnership where each partner is a parent of the child, payments for their services are generally not subject to Social Security and Medicare taxes if the child is under 18. However, the income they earn should be reported, and they are subject to income tax above certain limits.
Moreover, there might be a significant advantage if your child makes less than $13,850 a year, potentially exempting their income from federal income tax. This can, for instance, allow them to create an IRA and start saving for retirement early or even offset education costs.
Remember, the work your child performs must be legitimate and age-appropriate. The wages should also be comparable to what you would pay another employee doing the same job.
Lastly, ensure that you maintain proper documentation, just like you would for any other employee. This includes records of employment, time sheets, and payments.
In summary, hiring your children can have tax benefits, but that does not mean all their earnings are tax-free. Always consult a tax professional to better understand your situation and how the law applies to you.
How much can I pay my child to work for my business?
As long as they are doing legitimate work for your business, you can hire your children tax-free and pay each of them up to $13,850 per year.
It’s true. And all of this while they earn a little money and start saving for college or that first business. It is tax-free.
You may want to hire your child(ren) to work in your business. And you want to do it for many good reasons: to teach them about entrepreneurship, develop a strong work ethic, and for the tax-free income—up to $13,850 per child.
You can hire your kids and pay each of them up to $13,850 per year, tax-free. If you hire your son to stuff envelopes and your daughter to update your website, then you can lower your personal income by $27,700! Simply by engaging your children in the family business.
If they stay under this limit, they do not even have to file a tax return, which means they do not, which means they don't pay any income tax on it.
And you get to deduct their wages, which lowers your business’ taxable income.
BUT WAIT. THERE'SMORE.
The IRS will reward you for it!
If you have children between the ages of 7 and 22, you can use this strategy to save some money. Here is how it works:
- Your company can hire each of your children and pay them $13,850 a year. This is an important amount because it is the standard deduction amount for single individuals.
- Your business gets to take a deduction for the payment, thus decreasing your taxable income.
- Your children will then file their own tax return, and since they only made $13,850, they pay no federal income tax because of the standard deduction of $13,850, so their taxable income is zero.
- So the business gets to take a deduction, but the kids pay no federal income tax. It does not get much easier than that!
This strategy can also be combined with IRA and 401k strategies to really maximize the benefit. For instance, if you paid each child $13,850 as a salary, you could put $6,925 into an IRA that is deductible, and you can use their standard deduction to take their taxable income to zero.
In that case, your business can deduct $20,775 per child, but again, there is no taxable income.
If you want to save money, then hire your kids and make sure they actually work!
Keep track of the hours and tasks your children perform, and make sure they're age-appropriate.
DOL Rules Regarding Youth & Labor
The IRS isn’t going to believe your 5-year-old earned $13,850 analyzing dental records.
But that 5-year-old can model those pearly whites in photographs to be used on your website or brochure!
It’s easy to document an “image agreement” that pays an ongoing licensing fee right from the start.
So you DO NOT have to pay payroll taxes for employing your kids if your business is a sole-proprietorship, a single-member LLC taxed as a disregarded entity, or an LLC taxed as a partnership and owned solely by you and your spouse
Using this strategy, rather than just dumping change into their jar (money you likely paid personal taxes on), you’ve moved those taxable dollars from your tax rate to your child’s tax rate and bracket, which is zero, and you still keep the money in the family!.
There are countless jobs kids can do for you, and remember, you can pay them at the same rate you would pay any other employee or outsourced company.
- Cleaning the office
- Washing company cars
- Updating customer lists on the computer
- Simple to advanced Data-entry
- Transcribing video or audio
- Trips to the post office or general errands
- Helping at the office, passing out handouts, and more
- Walking door to door, placing fliers for your business
- Updating your social media accounts (They won’t even equate this as work!)
But then, let’s say, after reading the guide, you find out that this strategy “doesn’t work” if your business is a corporation.
It's clear that hiring your kids can have multifaceted advantages, especially from a tax perspective, aiding asset transfer, fostering skill development, and even contributing to succession planning. Let's break down the key concepts embedded in this article:
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Tax Benefits:
- Children under 18, employed in a parent-owned business, can avoid Social Security and Medicare taxes if the business is a sole proprietorship or a limited partnership where both partners are parents.
- Business owners can deduct salaries paid to their children from the business income, reducing taxable profit.
- Children are taxed at their own rate, typically lower than their parents', potentially resulting in reduced overall tax liability for the family.
-
Asset Transfer and Wealth Building:
- Wages paid to children can be deposited into savings accounts or investment vehicles like Coverdell Education Savings Accounts or Roth IRAs, facilitating wealth transfer without gift or estate taxes.
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Personal Development & Skill Acquisition:
- Hiring children provides them with invaluable real-world experience and essential business skills, aiding in their personal and professional growth.
- Skills learned through work experience can enhance career prospects and foster entrepreneurial instincts.
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Succession Planning:
- Early involvement in business operations prepares children to take on future leadership roles, ensuring business continuity across generations.
Additionally, there's a specific focus on tax-saving strategies:
- Paying children up to $13,850 annually (the standard deduction for single individuals) can result in tax-free income for them, while the business deducts these wages, reducing taxable income.
- This strategy can be combined with IRA and 401k contributions for further tax advantages.
Key reminders and considerations:
- Work performed by children should be legitimate, age-appropriate, and adequately compensated.
- Proper documentation, including employment records, time sheets, and payments, must be maintained.
- There are limitations to this strategy; for instance, it might not apply if the business is a corporation.
The article emphasizes the importance of legality, appropriate compensation, and adhering to IRS regulations. It also lists various tasks suitable for children in a family business context, highlighting the diversity of roles they can perform.
