Hiring your minor children to work in the family business is a great way to help them develop a solid work ethic, teach them money-management skills, and fund their savings for the future. But employing your children also comes with a number of valuable tax benefits that you might not be aware of.
And following the passage of the Tax Cut and Jobs Act (TCJA) last year, those benefits just got a whole lot better. Here are a few of the ways hiring your kids can produce significant tax savings.
The tax benefits for you
By hiring your children to work for your business, you can deduct their wages from your business income as an employee wage expense. This is likely money you would have spent on them anyway that can now be used to lower your company’s taxable income.
Such a write-off can not only reduce your company’s federal income taxes, but if applicable, your self-employment and state-income taxes as well. This can be a major savings, but it can also be easily abused by those who claim the benefit without actually having their children do legitimate work in their business.
Given this, the IRS requires your children to meet a few criteria before you can write off their pay as a business expense:
- They must be doing legitimate work appropriate to their age and skill level.
- These services must exceed the normal duties and chores they’re already required to do.
- The child cannot be over-compensated and must be paid the going rate for their services.
- Good records must be kept, including W-2s.
- Their services, work conditions, and hours must be in compliance with federal and state child-labor laws (though such laws are typically far more flexible for those who employ their own children).
Tax benefits for your children
your children will pay zero federal income tax on anything they earn up to $12,000. In light of this increased deduction, hiring your kids makes more sense now than ever before.
And depending on your business structure, you may be able to save big on your child’s payroll taxes, too.
In certain cases, you may not be required to withhold or pay any Social Security and Medicare tax (FICA) or federal unemployment tax (FUTA) on your kid’s wages. This payroll tax exemption applies to sole proprietorships, single-member LLCs taxed as a sole proprietorship, husband-wife partnerships, or LLCs treated as a husband-wife partnership.
This exemption applies to both part-time and full-time work. The FICA exemption covers those under age 18, while the FUTA exemption lasts all the way until they reach 21. This allows you to shift some of the income from your own tax rate to your child’s rate, which is most likely significantly lower than yours.
Workarounds for corporations
If you run an S or C corporation, you’ll have to withhold payroll taxes on your children’s wages. That said, all of the other tax benefits still apply, and there are creative strategies that can allow even these corporate entities to reap similar payroll-tax savings.
For example, one way for corporations to qualify for the payroll tax exemption is to create a family management company. By setting up this new company as a sole proprietorship separate from your primary business and paying your children from it, you won’t have to withhold payroll taxes.
If you have an S or C corp, meet with us to learn more about such creative tax-saving strategies.
Keep your money in the family
With so many valuable benefits, hiring your children can be a highly effective tool to increase your family’s tax savings. Consult with us to discuss all of the potential benefits and learn more about other ways we can help you keep more of your hard-earned money in the family.
We offer a complete spectrum of legal services for business owners and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer you a LIFT Your Life And Business Planning Session, which includes a review of all the legal, insurance, financial, and tax systems you need for your business. Schedule online today.