When you run a small business, there are a number of advantages to hiring your children. These advantages come with built-in secondary advantages come tax time. Once you are familiar with these perks you will likely wonder why you didn’t hire your kids sooner.
Hiring Your Kids and Taxes
The greatest tax advantages will be reaped if your company is unincorporated and your children are under the age of 18. Once your children reach the age of 18 you will no longer enjoy any of the economic advantages of hiring them.
Some basic rules to keep in mind:
- All work your children performed must be essential to the operation of the business. Another way of putting this is to say that the work must be so important that you would hire someone else to do it if you did not have a child.
- The tasks must be appropriate to both the child’s age and his skills. This means that you can hire a small child to wash a car and a teenager to program your website. Hiring a young child to work an assembly line will probably bring your company under the scrutiny of the Internal Revenue Service, and perhaps even the Department of Labor.
- You must pay your child a reasonable wage for the work performed. This means that it must be in the same range as wages that you would pay for an adult or a non-family member to do this work.
- Your child must be paid on a regular basis with a check. One lump payment at the end of the year will raise red flags.
- Treat your kid like other employees. Make sure that he punches a clock, attends mandatory training and does everything else that workers in your employ are required to do.
- Keep records. If the IRS decides to audit you, having detailed records verifying your child’s work will be invaluable.
There are two major benefits of hiring your minor children to perform work for your business.
- Your business does not have to withhold Social Security or Medicare taxes until the child turns 18. The IRS assumes that you will foot the bill in the event of illness or injury.
- You also do not have to withhold unemployment insurance taxes for your children, as it is expected that you will take care of your child if he loses his job.
This combined effect is that you do not have to pay anything in the way of payroll taxes for your children. Your children will also benefit from this arrangement by being able to keep more of what they earn.
A Win-Win Situation
Hiring your own children for a tax break might appear exploitative at first glance, however nothing could be further from the truth. Not only do your children benefit by avoiding paying FICA taxes, they get valuable work experience at the same time. For those who wish to pass their business along to their children upon their retirement, hiring your kids is a way to save money on taxes and provide them with a working knowledge of your business.