Hiring your children to work for you and help grow your business can be a unique experience. Not only do you get to spend more quality time with your kids, help shape them as a person and get them ready for the workforce (or transition full-time into your business), but you can also take some responsibilities off of your plate and fill any gaps your business may have.
If you own and operate an LLC, spousal partnership or sole proprietorship where you use Form 1040, Schedule C for your taxes, you can take advantage of some great tax savings, provided you meet certain criteria and are legitimately employing your children according to the IRS guidelines.
Should You Consider Hiring Your Kids?
There are really only three questions you need to answer:
- Do you need their help?
- Are you thinking of lowering your taxable income?
If you answered yes, then hiring your children can be a smart tax strategy for your business.
Running a family business can be fun and gratifying at the same time. The key, however, is to ensure you’re following the rules so the IRS doesn’t come after you for working the system (yes, people have tried it in the past and were caught).
Tax Rules for Hiring Your Own Children
If you are thinking about hiring your children, the IRS has some strict rules and regulations you must abide by. Here are those requirements:
- Your business formation needs to be an LLC, sole proprietorship or a partnership where it is only you and your spouse.
- Your child or children should be old enough to complete tasks given.
- Your child or children must be under the age of 21.
- Your child or children need to be hired as a part-time employee doing actual work.
- Your child or children should be paid fairly for the work they are expected to complete.
- Your child is not responsible for paying taxes on a salary less than $12,000 per year (anything over that amount is taxed).
- You must document how many hours your children work and work completed.
- You must document when your children are paid and how much they’re paid.
- You must file Form W-2 each year for wages paid to your children.
- You must follow all other standard and legal rules that come along with employment.
It's important to emphasize the requirement that your children are paid fairly for the work they are expected to complete. This does not give you permission to simply hand over $1,000 every month and cash in on the tax savings from hiring your children.
Should the job require a monthly salary of $1,000, it needs to be shown and supported just like any employee you hire. If you hired an employee who wasn’t your child to pass out flyers around town, you wouldn’t pay them $1,000 for the month just to do that, right? Therefore, you shouldn’t assume you can work the system and do this with your child.
Using the flyer example, if you feel paying them $10 an hour to complete the task is fair, then use that payment structure. Again, they are part-time employees and may only be working a few hours every week due to their school schedule or other commitments.
When it comes to age, there is no set age requirement (think of babies being used in ads for businesses), but your children should be old enough to handle the responsibility they are given in your business. For instance, you wouldn’t have your five-year-old updating your website and writing code. So, you need to be reasonable with at what age you would consider hiring your children and for what role(s).
Note: If you operate as a corporation (S Corp or C Corp) or in a partnership where both partners are not spouses, you must pay ALL standard payroll taxes.
How Does Hiring Your Kids Help You Save Money on Taxes?
When hiring your children to work for your business (assuming they meet the criteria laid out above), paying them $12,000 or less a year is completely tax-free. How? Thanks to the new standard deductible being set at $12,000 (for a single taxpayer), not only does your child not need to pay taxes on that amount, but neither do you as the business owner (this saves you from withholding both income taxes as well as payroll taxes). You also get to take the $12,000 you paid your child and deduct it as a business expense.
Thanks to the IRS, as long as your child is under the age of 18, they are exempt from:
- Social Security Tax
- Medicare Tax
- Federal Unemployment Tax (FUTA)
The caveat to this is when they turn 18. At the age of 18, your children (as well as you as the business owner) need to start paying Social Security tax and Medicare tax. Then, once your children turn 21, they (and you) will be required to pay their share of Federal Unemployment Tax (FUTA). Until that point, enjoy all of the non-taxable income you can from hiring your children!
In addition, if you own a home business, you have even more tax exemptions and write-offs you can take advantage of.
What Are Some Jobs You Can Hire Your Children For?
As mentioned earlier, when hiring your children, you need to put them in roles that suit their abilities. The examples listed before are simply ideas; they may or may not be suitable for your child(ren) based on their age, so please be mindful when choosing areas they can help.
- Landscaping and shoveling snow (must have a physical business location and not a home business)
- Answering the phone when people call the business
- Assisting with general office work
- Copying and scanning documents
- Shredding documents
- Data entry
- Handling social media platforms for the business
- Appearing in advertising materials
- Delivering office supplies
- Doing research online
- Running errands
- Making deliveries
- Cleaning the office
- Refilling snacks and coffee in the break room
- Sourcing and comparing prices for office supplies
- Filtering incoming emails
Does all of this sound great? If you want help with navigating how to hire your children and meet all of the requirements properly, Incfile is here for you. We can help you at tax time to ensure you're getting all of your deductions or answer any questions you may have about managing your business.