If you run a small business that is not incorporated, consider hiring your kids to reduce your tax bill. Here’s why.
If you own your own business, by hiring your children you can save in the following ways:
- Salaries paid to children under 18 are not subject to Social Security or unemployment taxes (in most states).
- No Federal withholding taxes are required if the child is under age 21 and earns under $5,950 per year.
- Even if the child must pay taxes, the child’s rate of tax is normally lower than your own rate.
- You should not have to pay worker’s compensation for the child as you would on a non-family member.
Set it up correctly
To ensure your child’s income is not challenged here are some suggestions:
- Provide a job that your child can reasonably handle. Ideas include; filling the company vending machine, copying, clean up, mailing, help with advertising, light packaging, light typing and customer service.
- Pay your child at least minimum wage and a wage rate that is comparable to what you would pay someone else to do the work.
- Make payments periodic (at least once per month).
- Include a W-2 at year-end.
- Keep the same payroll records as you do for other employees.
Other things to note
- Hiring your children to work for you does not apply if your business is a C-Corporation.
- This benefit works best if your business is unincorporated (sole-proprietor).
- Do not have children conduct dangerous or heavy industrial work as this could come under review by the Department of Labor.
- Treat your child like other employees. This includes time-cards and training.
Besides the tax benefits, hiring your children can gain them valuable experience and help them understand what you do every day.