As a small business owner, have you considered hiring your children? If not, perhaps that is something you should consider. Hiring your children can help in a number of ways, including helping you to free your time for more important activities, giving your children an opportunity to gain valuable experience, AND can be an excellent way to reduce your taxes by converting non tax deductible allowances to tax deductible wages. This opportunity is available to sole proprietors, independent contractors, as well as S-Corp and C-Corp businesses.
Tax Benefits of Employing Children
As mentioned above, hiring your children can be an excellent strategy to reduce the overall family tax burden. Unless they are full-time employees, your children often will not pay any taxes at all on their wages. Your business, on the other hand, can take a tax deduction of the wages paid. If you are a Schedule C filer, you’ll also reduce your self -employment tax (up to 15.3%) on the wages paid. If you live in a state with a state income tax, it is quite possible to see a savings of 40 cents on the dollar of wages paid.
What are some of the Rules?
Note that the work should be appropriate to the child's age and actually be performed by the child. Can you hire some of the younger members of the family? Sure, there are many tasks that even young children are able to perform including things like folding mailers, stuffing envelopes, and applying address labels.
You should handle your family employees as any other employees (perhaps even more carefully). For example, keep time sheets substantiating that the work was done, keep them on payroll, provide them with w-2’s , etc…
Care must be exercised not to lose the dependency deduction for your child. On the other hand, it may open up new benefits. For example, in certain situation’s a parent may not be able to claim a credit or deduction for education expenses because their income is too high. If the child has no income the credit is lost. However, with W-2 income and their own dependency, payments from parent to child, through the business, may create income that will allow the credit to be used. Planning of this type will minimize your family tax liability, but it can get complicated, so consider getting a competent tax professional.
Here’s an example of how much you can Save
Let’s say you have a child under the age of 18 who earns $8,000 for services. Children of a business owner of a Schedule C filer, under the age of 18, may be exempt from withholding for Social Security and Medicare as well. In this example, if that is their only income, they will owe no income taxes. On the other hand, let’s say the parent is in the 24% federal tax bracket and 6% state tax bracket, including savings of 15.3%, the parent may save a total of $3,624 or 45.3% of the amount paid. Of course, savings will vary based on each unique circumstance, but there are opportunities for substantial savings. That’s an all around win. The child learns a skill while earning a wage and the family saves overall.
If you are a business owner and have children, you should consider this deduction. Talk to your tax professional! If you need professional help with some tax planning, give me a call at (972) 821-1991 or set up an appointment on my calendar at https://meetme.so/BobJablonsky