Tax Benefits of Hiring Your Children as a Business Owner
Hiring your children can be more than just a way to teach them responsibility and give them hands-on experience in your business. It can also provide significant tax advantages for your business and your family as follows:
By: Vicki Sussman, CPA - Sussman & Addis, CPAs
1. Deductible Wages
When you hire your children to work in your business, the wages you pay them are tax-deductible as a business expense if they are paid correctly as an employee. This reduces your business’s taxable income, potentially lowering the amount of tax you owe. The wages must be reasonable for the work performed which includes paying children for participating in promotional ads. Note their work must be properly documented.
2. No Payroll Taxes for Family Businesses
If your business is a sole proprietorship or a partnership in which both partners are the parents, and your children are under the age of 18, you are not required to withhold Social Security and Medicare taxes (FICA) on their wages. This can result in substantial savings on payroll taxes. Additionally, your child’s earnings are not subject to Federal Unemployment Tax (FUTA) until they turn 21.
3. Shifting Income to a Lower Tax Bracket
Paying your children shifts income from your higher tax bracket to their potentially lower tax bracket. For example, if your business income is taxed at a high rate, shifting a portion of that income to your children through wages may result in a lower overall family tax burden which includes paying children from a corporation even though they are subject to payroll taxes. If your child’s total income is below the standard deduction for their filing status, they may not owe any federal income tax at all.
4. Funding Retirement Accounts
The wages your child earns from working in your business can be used to fund an IRA, which gives them a head start on retirement savings. Contributions to a Roth IRA, for instance, are made with after-tax dollars, and the funds can grow tax-free, offering long-term financial benefits for your child.
5. Education and Personal Expenses
The money your child earns can be used for their personal expenses, including education costs. This can effectively shift the burden of paying for certain expenses from your after-tax income to your child’s pre-tax earnings, providing additional tax savings.
Important Considerations
Document Everything: Ensure that your child is performing legitimate work, and keep detailed records of hours worked and tasks performed.
Pay a Reasonable Wage: The wages paid to your child must be reasonable for the work performed to avoid scrutiny from the IRS.
Consult a Tax Professional: Tax laws are complex, and it's important to ensure that you're fully compliant with all regulations. A tax advisor can help you navigate the specifics and maximize your tax benefits.
Hiring your children can be a win-win situation—offering them valuable experience while also providing your business with tax advantages. With proper planning and documentation, you can make the most of this opportunity.
More information on services that Vicki and Sussman & Addis CPAs can be found on their website.
