Did you know that you can include your underage children in your business and receive a tax break for it? Hiring your children allows them to work for you, while making wages for themselves.
Now, this isn’t your typical “allowance” situation, where your children mow the yard or wash the dishes. This only applies if your child is being paid a reasonable wage for performing work directly related to your business. In fact, the wages paid to your child should be saved for their future in a verifiable manner. This is what makes it possible to pay your children as employees as opposed to under-the-table methods that could land you in trouble with the IRS.
Let’s dig into this a little deeper to give you a better understanding of how you can hire your children, and what benefits this gives to you, your children, and your company.
Whatever the work that your child is performing, it must be directly related to your business to take advantage of this tax deduction. Sweeping the floor of your beauty salon is eligible, while paying your child to fold laundry while you’re at work is not.
And while they perform eligible work for you, you must pay your child reasonable wages for their age, experience, and position when compared to similar positions with similar circumstances. If you pay Jill the adult secretary $10 an hour, then employing your child to file documents and stuff envelopes should pay close to that wage.
A question often asked at this point is, when can they start?
Children as young as 7 years old can begin collecting wages from your company, as approved by the Tax Court.
This means they can grow some serious savings over the years, and you can reap some great benefits as well.
Not only will you be getting to spend a great deal of time with your child, instilling them with the same principles and values that make you successful, but you’ll gain another number for your employment records. This means that having your children as employees can help with establishing benefit programs, like medical expense reimbursement plans, retirement plans, education assistance plans, and others.
In addition to that, if your business is taxed as a proprietorship, then you won’t have to pay Social Security or Medicare taxes on their wages until your children are 18 years old. While they’re still under the age of 21, you also won’t have to pay unemployment tax. This can also apply if your business is taxed as a partnership so long as you and your spouse own all partnership interests.
Just how much can your child earn? As of 2018, they can earn up to $12,000, which is the standard deduction for single taxpayers. The “kiddie tax” that often applies to children’s investment or other unearned incomes doesn’t apply here, which means more money to put in the piggy bank. And if your children earn more than $12,000? Up to $9,525 over that amount is only taxed at 10%.
The earnings made by your child must be audit-proof. This means keeping a timesheet showing dates, hours, and the services performed, along with keeping check stubs for each payday. Children should be paid by check to make this easier for everyone. Deposit those checks into a bank account under the child’s name, such as a Roth IRA or Section 529 college savings plan.
If you want to allow your child’s money to be used outside of long-term savings, you can deposit the funds into a custodial account. You can’t use that money for any obligations dealing with parental support, but certain activities paid for by the parent, such as private school, summer camp, or other extraneous activities can be paid for with the funds from the custodial account.
To get started with hiring your child, fill out a Form W-4 for your records. Set them some tasks directly related to your business, and watch them grow.
Remember to keep up with your tax records, which includes filing a Form 941 (quarterly) or Form 944 (annually) to report any FICA or withholding taxes and a Form 940 (annually) to report on unemployment taxes.
Finally, fill out a Form W-2 and file it, along with Form W-3, annually.
Want to avoid all that paperwork? Have your child learn how to deal with it themselves!
Hiring your children is great for family businesses. Everyone benefits, and you’ll have extra help in your company. The best part is that your child will later thank you for the experience, and they’ll enjoy reaping the benefits of a well-funded bank account they worked so hard to build.