One of the ways to find extra tax breaks in your business is to hire your children to work for you. This is a great way to generate another expense for your business, while saving on taxes in other ways.
Tax Savings When You Hire Your Kids
Hiring your children to help out with your business can help you enjoy family tax advantages, and provide you with savings that you won't see when you hire workers outside your family.
First of all, if your kids are under 18, you don't need to withhold income taxes or payroll taxes, as long as you are a sole proprietorship or LLC. You have to wholly own the sole proprietorship or LLC in order to avoid withholding payroll taxes for your children. So, my husband and I own the LLC that I do business under, so we can hire my son, and we don't have to worry about withholding payroll taxes for him. Realize, though, that if you have a C-Corp or S-Corp you will need to withhold payroll taxes even for your own children under the age of 18.
You can also avoid paying into workers' compensation insurance funds when you hire your own children. This can be a great help to your business as well, allowing you to put that money to use elsewhere as you build up your enterprise.
What you pay your child for work done can also be considered a business expense. This lowers your business income — and in turn lowers your taxes. Make sure you keep good records of what your child does, and how you pay him or her, so that you have documentation to back up your expenses.
Finally, paying your children means that their income, up to the amount of the standard tax deduction for single filers, is tax free. Even if you pay your children to work in your business, you can still take the dependent exemption, and claim the child tax credit (if you are eligible). Also, don't worry about the so-called “kiddie tax.” That rule only comes into play for unearned income, such as investment income. As long as your child has earned income from working in your business, he or she is taxed at his or her own rate.
Make Sure Your Child is Really Doing Work for Your Business
In order to enjoy the benefits associated with hiring your children, you need to make sure that they:
- Do actual work: They need to contribute to the business in a meaningful way. I pay my son to help me with tasks around the home office, and to help me with research and other age-appropriate aspects of my home business. This doesn't include chores, however. You can't pay your child for doing chores around the house and then expect to get a tax advantage for your business. Make sure your child is doing actual work for your home business.
- Receive reasonable pay: The IRS doesn't look kindly on your claim that your 13-year-old is paid $25 an hour to stock shelves in your store. That's just not reasonable pay. Your child has to receive reasonable pay for his or her age, and for the work done.
As long as you are careful about what you have your child do, and as long as you keep good records, you should be able to hire your child and receive the benefits associated with paying him or her as part of your business.