Being a business owner can be tough, especially if you’re up against a tight labor market. If your kids are old enough and want to participate, should you hire them as employees? The good news is that there may be significant tax advantages to hiring your child to work in your business.
When you hire your child, you get a business tax deduction for the employee wage expense. That allows you to reduce your tax bill for money you might have given your kid anyway.
If your business is a sole proprietorship, a single-member LLC that pays taxes like a sole proprietorship, or a husband and wife partnership/LLC, you can hire your under-18 child and their wages will be exempt from certain taxes.
If your business operates as a corporation, your child’s wages are still subject to all the standard taxes, just like any other employee.
Like any other worker, your child can take advantage of the standard federal income tax deduction, so the first $12,550 of their earnings will be tax free. Plus, employing your child in the business creates earned income that can qualify the child to make a Roth IRA contribution.
There are two rules you need to follow in order to avoid having deductions denied by the IRS. First, the child must do bona fide work in the business. That means their work must be beneficial and they must actually work in exchange for their wages.
In other words, you can’t use the business to pay them for doing chores around the house, but cleaning the office, business landscaping, answering phones, or helping with your social media are all qualifying services.
Second, the child’s compensation must be reasonable, meaning no more than what you’d pay someone else for the same work. Have them track hours, just as any other employee, and pay them out of your business account (by check or transfer, not cash) on a regular payment schedule.
When your child is old enough to work in the business, you must adhere to applicable laws. Know how many hours they can work, time of day limitations, and any other restrictions.
If you have questions about what’s allowed and how to maintain proper documentation, consult a business lawyer who can keep you up to date on current laws in your state.
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