If you own a business and need some extra help this summer you might want to look to your children. There are many benefits to hiring your kids – they get experience, they learn about earning and managing money, and you can get tax breaks.
To make it all happen though there are some rules and limitations. Keep reading to learn more about them.
Real Jobs Only
Legitimate and reasonable are the two important words here. If you want to take advantage of the write offs they need to be true. This means that you can’t just “hire” your child to do nothing at an exorbitant wage. They need to work a regular schedule and have a real impact on your business. They also need to be paid legally.
Let’s say you’re a sole-proprietor and your business does well so you are in the top tax bracket (37%). You hire your child to help around the office collating paperwork and generally doing things you don’t want to. They work for you all summer and into the fall and earn $10,000 in wages.
Those dollars going to your child instead of you means $3,700 is knocked off your federal income tax obligation and will likely be sheltered completely for your child as it is under the $12,200 standard deduction. Even if your child has earned more than the deduction, any wages over that will be taxed starting at 10% instead of your higher rate.
Saving on Payroll Taxes
If your child is under 18 and your business isn’t incorporated, your child’s wages are exempt from FICA (Social Security and Medicare) taxes; they remain exempt from FUTA (federal unemployment tax) until age 21.
If your business is incorporated or a partnership with people not parent to your child FICA and FUTA taxes apply.
Learning a Fact of Life - Taxes
By hiring your child you get the chance to teach them about the real world and the inescapable nature of taxes. They can see how a W4 works and see firsthand the difference between a gross wage and a net wage. It also gives them an introduction to budgeting more so than an allowance might.
Hiring Family in Household Employment
This situation is a little different than hiring your child in a corporate role. Sometimes we see parents who pay their eldest child to watch younger siblings but most common in this case is an elderly parent paying their grown children to be full-time caregivers. Also common is “hiring” a grandparent as a childcare provider. IRS Publication 926 lays this out in a complicated way but, in most cases, if the care is needed then there would not be any employment taxes involved. They can still be paid voluntarily (so the employee still gets quarters of FICA taxes paid) but aren’t required. On this point we are happy to help answer questions.