Children bless our lives with joy and meaning. They also fill them with tax benefits.
We are all well aware of the personal benefit of claiming children as dependents on your tax return: Every child you claim can lower your taxable income by $3,950, and the Child Tax Credit can save you another $1,000 per qualifying child if your income is less than $110,000/year. But there’s another way to lower your family’s taxes that only applies to business owners: hiring your own child. If you’re interested in helping your children develop a sense of responsibility and strong work ethic, while simultaneously letting them earn some money and maybe even save for college, all tax-free, read on.
Children under the age of 18, working for their parents, doing legitimate work for the business, are entitled to compensation of $6,300 per year tax-free. If they stay under this limit, they usually don’t even have to file a tax return. The benefit for you is that you get to deduct their wages, which lowers your business’ taxable income. For sole proprietorships and LLCs taxed as a partnership, you even get to avoid the payroll tax. Using this strategy, you can effectively move income from your high tax rate–or your business’ high tax rate–to your child’s tax rate, which is zero. And you’ve kept all the money in the family. It’s a win-win.
There are countless jobs kids can do for you, and you can pay them at the same rate that you’d pay any other employee. Here are just a few ideas:
- Cleaning the office
- Washing company cars
- Updating or cleaning databases
- Data-entry
- Transcribing video or audio
- Making trips to the post office
- Weeding or mowing the lawn at your business
- Helping at live events by passing out handouts and making sure the room is picked-up
- Modeling in brochures
- Walking door-to-door and leaving fliers for your business
- Updating social media accounts
The options are limitless, but to avoid IRS scrutiny, follow these guidelines:
- The job must be reasonable for their age. For example, you can hire your 15 year old to file paperwork, take out the trash, and answer phones. You can’t hire the same kid drive heavy equipment. For many reasons, don’t attempt that.
- You need to document the job as if you were hiring anybody else. Make sure you have a job description and employment agreement.
- Make sure the salary the corporation is paying the children is reasonable for the job they are doing. If you already have an employee doing similar work, then use that as a guideline for what they should get paid. If you are creating a new position, then do a comparative study based on the type of work and the business you are in.
- Make sure you keep a timesheet showing the hours/days worked. This will help substantiate the amount of money received for work.
- You must own your own business, or be a single/married couple that owns an LLC. Hiring your kids through a corporation will require you to pay payroll tax, but you can still write off their wages.
- You can still take the Child Tax Credit up to $1,000 if you qualify.
Remember, these deductions apply only to your children under the age of 18 who are your dependents. College kids, nieces/nephews, neighbors' kids or dependent parents don't meet the requirements.
If your kids are like my kids, they are going to love getting their hands on some spending money. But you’re the parent, so make sure all that money isn’t spent on videogames and mobile apps. Encourage your kids to put their money into a college savings account, or even a Roth IRA, where $5,500 per year can be put away tax-free. Show your kids how saving now can reap huge rewards later.
Putting your kids to work provides some amazing tax benefits while simultaneously introducing your kids to the family business. For a small business owner, can it really get any better?
