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  • Vanessa Gonzalez-Penaloza

Why Hiring Your Child Is a Good Tax Strategy to Save on Payroll Taxes


Can you really hire your child to work in your business? Simple answer, yes!


Hiring your child as an employee is a great way to save money AND recent changes to the tax laws under the Tax Cuts and Jobs Act just made it even better.

BENEFITS TO HIRING YOUR CHILDREN

It’s true, there’s a great tax benefit to hiring your child as long as they’re doing legitimate work for your business. Jobs such as cleaning the office, washing company cars, updating customer lists on the computer, data entry, transcribing videos, stuffing envelopes, etc.

Best part is with the new tax law change you’re allowed to pay them up to $12,000.00 per tax year (which is up from the previous $6,350.00 in 2017).

That’s $1,000.00 a month to them and a tax deduction credit for you which can lower your business’ taxable income!

They make extra money and you get to lower your tax responsibility.

How?

I’ll continue.

HOW DOES THE TAX DEDUCTION WORK?

You see, the IRS actually rewards you for hiring your children between 7-22 with a tax credit. I know it's shocking, right?


Here’s how it works:


  • You can employ each of your children in your business and pay them an annual wage of $12,000.00. Why $12,000.00? Because it’s the standard deduction amount for single individuals.


  • Your child then files their own tax return. Since they only made $12,000.00 they don’t pay federal income tax. Why? Because the standard deduction is $12,000.00 making their taxable income ZERO!


  • Your business gets to take a deduction for this payment, which decreases your taxable income. It’s a win, win.


Also, if your business is a single-member LLC taxes as a disregarded entity, an LLC taxed as a partnership and owned solely by you and your spouse or a sole-proprietorship, you DO NOT have to pay payroll taxes for employing your children!


But note, that there are different rules for different types of businesses.


For example, FICA tax doesn’t have to be withheld if the child is under 18 in an unincorporated business but in an S or C Corp. or a partnership that includes non-parent partners there’s no exemption. Make sure to speak to an accountant if you’re not sure what to do.


Keep in mind, the IRS is clearly aware of the tax benefits of hiring a child, so they’re paying close attention to who is claiming this benefit without actually having their children work in their business. Be careful not to list your child in an unrealistic role!

Just remember to follow these simple rules as to not lose the tax credit and benefits:

  1. Your child must be a real employee.

  2. Compensation must be reasonable.

  3. Comply with legal requirements for employers. Fill out IRS Form W-4 and complete Employment Eligibility Verification.

Want to learn more? Reach out today and I will be glad to answer any of your questions.


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