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Hiring Your Child TAX FREE

Pay your kids tax free, reap the tax benefits and provide your

children

with valuable work experience.

First, you can deduct the overall wages you’re paying as a business expense, lowering your overall tax bill just like any other business expense.

Second, if your children are under 18, you don’t have to withhold or pay any FICA taxes on their wages. This can work better than hiring someone outside of your family, where you wouldn’t get such a tax break and would have to cover paying taxes on their wages.

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Tax Advantages Depend on Your Business Entity

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The tax advantages overall, including the ones for hiring your kids, are different based on your business entity.

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  • Limited Liability Company (LLC)

    • If you’re a single-member LLC taxed as a disregarded entity or taxed as a partnership and owned by you and your spouse, you don’t have to pay payroll taxes for employing your kids.

  • Partnerships

    • Since partnerships are like sole proprietorships in that they’re not technically registered, the benefits you’ll have are just like LLC’s taxed as a partnership, yielding benefits like not having to pay payroll taxes like you would if you were a corporation.

  • Corporations

    • As an S corporation or C corporation, the Internal Revenue Service technically states that you have to withhold payroll taxes when you’re employing your kids. That means, just like with any corporation, you’re in charge of both business side and employee side taxes. There is a loophole around this if you’re willing to take some time for the workaround, which is creating a separate company. This is often times referred to as a family management company or FMC, and it’s a sole proprietorship for families in this exact scenario. It’s an intermediary company with the sole purpose of supporting the operations of your corporation. From here, you’ll establish contracts between your business and your FMC, including the expenses that you’ll claim for your business like your kids’ payrolls that you can now use as a tax deduction. Your CPA can help with guidance on this.

 

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Things You Should Remember

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Hiring your children for your business can be a great way to save money on taxes and give them valuable work experience. However, there are a few things you need to keep in mind to make sure that you are doing everything correctly.

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  • Your Child Must Be a Real Employee

  • It’s legally required to pay your child for ordinary and necessary needs for your business. This could be anything from managing your company’s social media account to washing the company car to managing the door of an event.

  • Ensure your child Is suitable for the job

  • Not all jobs are suitable for children. As much as your 7 year old might want to close up the store for you, consider what they are truly capable of and what might be too advanced for them at their current age. One of the great parts about hiring your kids is that the more they work for your company, the more they’ll learn as they go, being able to advance what they do as they grow older if they so choose. Technically, the IRS requirement is that your child can start working for you at 7 years old.

  • You Should Pay Your Child Reasonably

  • The amount of money you pay your child should be based on the value of the work they’re doing, not how much you’d like to pay them.

  • Stay in Compliance With the IRS

  • You need to make sure that you are following all of the relevant tax laws when you hire your child, including withholding taxes from their paycheck and filing the necessary paperwork with the IRS, if applicable

Does your Child need to file their own tax return if they work for you?

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It depends. If your child’s total earnings from all sources are less than $12,200, they do not need to file a tax return. However, if their earnings are more than $12,200 they will need to file a tax return.

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Should you give your child a 1099 or a W-2 tax form?

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The IRS allows any sole proprietorship or partnership (LLC) that is wholly owned by a child’s parents to pay wages to children under age 18 without having to withhold the payroll taxes and list it as “outside labor” - an expense. NOT Payroll. You do not have to issue a W-2. This is because there are no withholdings, and the penalty for not filing a W-2 is based on the withholdings.

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  1. Keep in mind, if audited, the IRS is quick to investigate family members' payroll. If it's clearly not possible the child could have performed the work as claimed, the IRS will disallow the payments. Document everything. Keep a log of days and hours worked, what was done, etc. 

Bring glory to God in all we do.

Colossians 3:23-24

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