This article is for educational purposes and is not intended to provide legal advice. It is important to note that your individual circumstances may affect the information provided in this article.
Have you ever wished you had a few additional bodies around the office on the weekends, after school, or during the summer? If you answered yes, you may want to consider hiring your teen-aged children or grandchildren. Not only will this reduce your workload, but it may also reduce your tax liability.
Learn how hiring your own children could help you save money come tax time in 2023.
Benefits of hiring your children to work at your business
Let’s pause for a minute of gratitude at the opportunity to involve your children in the family business! Not only do you get to spend more time with your child, but you’ll also find there are numerous financial advantages.
But before we look at financial advantages, we should also note the benefits your children will experience. Involving kids in your company can:
- Teach them about responsibility
- Help them build a strong work ethic
- Allow you to emphasize the value of money management
- Build their resumes for post-secondary education
- Give them insight into their own professional interests
Tax implications on earnings
Hiring your children to work at your business, whether during the summer busy season or year-round, offers a number of tax advantages to you as a business owner.
Lower tax rate
Let’s assume that your effective tax rate is 32% (the sum of the 25% federal rate and the 7% state rate). If you employ your child or grandchild in 2022 and do the books right, they won’t have to pay any federal income tax on the first $12,950 they make.
State personal income tax liability
Your child or grandchild’s personal state income tax liability would also likely be low. And the federal and state tax rates for them will remain low even if they increase their income. In this case, you may avoid paying around $4,150 in federal income taxes by giving your child $12,950.
That’s a sizable sum that could be reinvested in the company or used for other purposes.
And that’s not all! Possible tax breaks include those for Social Security and others.
Spending Less on Taxes and Social Security
Let’s say you’re a single proprietor (also called a Schedule C business) or you and your spouse run a partnership or an LLC taxed as a partnership, and you’ve decided to hire your kids. This might lead to even more tax benefits for you.
You can also avoid paying federal unemployment insurance and social security taxes on the income you get from employing your young children. When you add the 32% savings on income taxes to the 15.3% savings on Social Security and Medicare taxes, that’s a potential savings of $6,125.
To receive these discounts, though, the proper procedure must be followed.
The IRS permits parents who control 100% of a business to pay their minor children salaries without withholding payroll taxes if the business is a single proprietorship or limited liability company (LLC). The term “outside labor” rather than “payroll” is the correct designation here. Since there are no withholdings, no W-2 is required in this scenario.
We suggest sending a W-2 if your child will be making contributions to a Roth IRA, though. The IRS system may easily link the child’s earned income to the IRA contribution. The tax advantages of hiring a youngster might be enticing, but it’s important to be practical and keep accurate records.
Bear these factors and conditions in mind
Provide proper compensation with proper paperwork
The amount you pay your children should be enough but not exorbitant if you want to stay in compliance. Any remuneration must be fair in order to be deducted from gross income under the rules.
Paying your kids an appropriate wage can help keep everyone happy. You shouldn’t compensate them more than you would an unconnected third party for the same work. If you’ve never had anybody in a given role before, it’s a good idea to do some research to determine a fair salary. If your compensation is much more than the market average, you may attract the attention of the IRS. You might want to pay your children at least the minimum wage just to be safe.
Follow employment laws—especially in regard to minors
Both federal and state laws must be followed in regard to the employment of minors.
According to federal law, minors are allowed to work for their parents’ companies if they are not engaged in mining, manufacturing, or any other employment that the Secretary of Labor has determined to be unsafe.
Second, state laws may impose even stricter minimum ages than the federal government.
To ensure compliance, research the applicable labor laws in your state. S and C Corporations should exercise caution: The FICA tax break for child compensation is not available to businesses in any of these two groups.
The only legal option to avoid paying taxes on money given to your children is to set up a “management company” as a sole proprietor. You may do this by having your S-Corporation pay a genuine management charge to a management business and then having your sole proprietorship or single-member LLC pay your children.
Be mindful of your child’s limits
Parents frequently use their children in commercials, TV shows, and online videos. But while even very young children can do this work, make sure they aren’t working too hard for their age or ability.
For example, for safety reasons, there are age limits in several professions. You can’t recruit a 12-year-old to help you with a hazardous company like an auto repair shop. However, high school students can often handle minor office jobs including cleaning, envelope stuffing, data entry, and rudimentary bookkeeping.
Help your children and your business thrive
Hiring your children as employees in 2023 might be an excellent tax move for business owners. You could save money on taxes and teach your kids important things at the same time. As long as you follow the rules, you can provide your kids with an opportunity to build their skills and also take advantage of tax breaks when you hire them for a fair wage and in safe conditions.
Keep in mind that every situation is different, so it’s essential to discuss your approach with a lawyer who specializes in business and tax law. They will help you understand the law and the tax system so that you can make informed decisions.
We at the law office of Shann M. Chaudhry, Esq., PLLC are committed to defending our clients’ rights and assisting them in realizing their economic objectives. We construct tax solutions that evolve with you, stay true to your core beliefs, and stand the test of time, much as a sculptor shapes a work of art. Join us as we work together toward your shared goal of financial security and happiness.
Schedule a consultation today to chat about how hiring your children may help you save money in the long run. Working together, we can make a better tomorrow.