How to hire your child and save on taxes

How to hire your child and save on taxes

Running a small family business can be tough, especially if you do all of your taxes yourself. Perhaps you need to save a little bit of money here and there, and for that, your children can help. Hiring your child not only saves you money from cheap labor, but it gives you a well-deserved tax break.

How can your child benefit from this?

Children in the immediate family can learn important life skills and create necessary experiences that may help them take over the family business in the future. The income that you’ll pay to your child may even help them build an IRA, which is always good to start early on.

One way that way hiring your child can help reduce taxes is by removing money from your taxable income. For example, if your total income from your company is $100,000, you can pay your child $20,000 and report your income from your business as $80,000 thus reducing the overall business taxable income. Your child is in a lower income tax bracket, so they will end up paying less to the IRS.

How does it work?

As a small business owner, you can pay each child you hire $14,600 (in 2024) without them owing any federal income tax. The reason for this is because each individual is subject to a standard deduction, even children.

Furthermore, if you have a sole proprietorship, a partnership that only you and your spouse share, or an LLC, your children’s income is not subject to Social Security taxes or Medicare taxes. Please note, however, this is only true if you own 100% of your business. In addition, any dependent child under the age of 21 does not have to pay FUTA tax.

Although the benefits of hiring your child are remarkable, it’s important to follow the rules. One of the two main points of concern will be what your child is capable of. You cannot pay them an unreasonable wage. Additionally, you cannot pay your child for tasks, such as being a good luck charm or doing work unrelated to your business. You can’t just pay your child the standard deduction so that you can avoid paying thousands of dollars in taxes.

Instead, as their age increases, gradually increase both their income and responsibility. As an adolescent, let them do simple admin work, such as taking out the trash or organizing files. After a couple of years, maybe they can take phone calls and assist with simple data entry. Once they’ve become a young tween, introduce them to basic business concepts. Finally, when they reach an age where you believe that you can actually work with them, you can pay them what you feel comfortable with.

Pretend it’s not your child doing this job; ask yourself, if this was an adult, what would I pay them? The IRS has to be convinced that your child is actually doing some type of work.

Age considerations:

18 years and under

As long as your business is not hazardous, your child can work if they are 16 years of age and above. Those who are aged 14 and 15 can also work, but they have strict regulations in regards to their working hours. Make sure to check specifically what your state laws are regarding child labor.

However, if your child is below the age of 14, then they cannot work any job unless it is farm related. The only exception to these laws is if your family business is solely owned by you and/or your spouse. If this is the case, then your child can work any number of hours as long as, once again, the tasks that you are giving them are not hazardous.

Not regarding your child’s age but also important is if your business is a corporation. If this is the case, then your child is subject to FUTA tax, even if you are the only owner of the business and your child is under 21 years of age.

Now, this may raise several questions. If your immediate family doesn’t own 100% of your business and they are not yet of age 15, does this mean that you can’t hire your child? If I have a corporation, does that mean that I still need to pay FUTA tax? The answer to both of these questions is no. What you can do is create another business that is a sole proprietorship (does not necessarily have to be one, it just makes it a lot easier) with you being the only owner of this newly created business.

All you have to do now is hire your child/children to this new business that they can work in and say that you, and just you, are employing them. When you pay your child, give them a 1099 saying that you are paying them as a contractor from your new business. This way, you can hire your child who is under 14 years old without being subject to FUTA tax.

18 – 21 years

Since your child is of age, they must pay for medicare and Social Security, but since they are under 21, you do not have to pay FUTA taxes. For these individuals, you can actually pay them upfront and give them a W-2, but why do that?

Instead, give them a 1099 as well and make them apply for a 1040 and a schedule C. This will make it so that your child is paying taxes in a presumably lower bracket if they are making over the $14,600 standard deduction (in 2024). In this situation, they will have to pay FUTA taxes, as they are self-employed. It’s really up to you if you want to pay their medicare and Social Security taxes and build their Social Security payment history or if you want them to pay their own employment taxes by using this method .

Be mindful, however, that many more restrictions can come from state laws and taxes. A concern you may have is the Kiddie Tax. However, you shouldn’t think about this too much as the Kiddie Tax only refers to unearned incomes, whereas what we have gone over will make your child have an earned income.

For more information on types of taxes, contact a tax professional. The nuances in the tax code may seem insignificant, but in reality, a tax pro can identify many ways in which you can save money on your taxes. Sign up for MANA CPA services today to get help on a wide range of services offered to businesses.

Written by: Namah Patel & Akhil Yarlagadda

Reviewed by: Meg Bhatt, CPA