Small Business Owner? Hire Your Kids this Summer!

Do you own a small business? Do you also have a teenager (or teenagers)? You’re in luck! In addition to teaching your kid more about working hard, how your business functions, the importance of earning an income, and so on, there are also many tax advantages for your business when you hire your own child to help you around the office. Your business will also be eligible for the same tax advantages if you hire your grandchildren.

Tax Benefits of Hiring Your Own Child
By hiring your own child to work in your office or for your business, your business can take a tax deduction for their employee wage expenses, just like you can for any other employee. This will in effect, lowers your federal income tax bill, your self-employment tax bill if this applies to you, and your state income tax liability. Further, if your child meets the requirements outlined below, their wages are exempt from Social Security, Medicare, and FUTA taxes.

You can hire your child and capitalize on of these tax advantages if the following conditions are met:

• The child you hire is your biological or legally adopted child and is over the age of 14, but under the age of 18 (or 21 for the FUTA tax exemption). While the FLSA rules are looser for family members—the work the child is doing should be safe and within reason for them to complete.

• The business hiring your child must owned by you (and/or your spouse) and operates as a sole proprietorship, a single-member limited liability company (recognized as a sole proprietorship for tax purposes), or a husband-wife partnership (recognized as a husband-wife partnership for tax purposes).

• The child you have working for you must also be a legitimate part-time or full-time employee of the business, meaning the work they are performing is necessary for the overall management or success of the business.

Unfortunately, these tax advantages are not available if you are hiring your child to work for your corporation.

Under the new tax plan, TCJA, your child will not have to pay federal income taxes unless they make more than $12,000 in one tax year at this or any other job they may have. Further, by encouraging your child to save some of their earnings in a Roth IRA, they can begin to plan for the future.

Just as you would for any other employee, keep detailed records of their employment, wages, and work, and issue your child a standard W-2 at the end of the year. This will help your business adequately file taxes and have the necessary documentation on hand if it ever becomes necessary.

Involving your children in your small business from a young age is a great way to teach them financial independence and work ethic, the tax advantages are just an added bonus. Interested in learning more about the hiring your children as employees and the tax advantages? Contact the accounting experts on the Tally Services team. We’ll walk you through the process and help you understand the ins and outs of hiring your kids this summer.