Running a family business comes with the fantastic perk of being able to pay your kids for their work. Whether they’re young adults, teens, or tweens, this is a major advantage.
Not only will hiring your kids help them develop a strong work ethic, but they'll also gain experience managing money. This is the perfect opportunity to jumpstart their ability to save for their future while keeping more wealth in your family.
In return, you get employees who have a built-in sense of commitment, teamwork, and loyalty, and you may even end up with a long-term succession plan. This sense of dedication is why so many business owners like to claim that their team is “just like family.”
Furthermore, hiring your kids has some noteworthy tax-saving advantages. With the newly passed Tax Cuts and Jobs Act (TCJA), these benefits are now more advantageous than ever before. Nevertheless, if you do hire your children, be sure they're doing authentic work and that you pay them reasonable wages to avoid any unwanted IRS speculation.
We will go into further detail regarding this matter below.
The first $12,550 your child earns is tax-free
The Tax Cuts and Jobs Act raised the standard deduction from $6,300 to $12,550 starting in 2018. So your children won't pay any federal income tax on what they earn up to that amount each year. This alone can save you thousands of dollars annually, and it applies to both minors and those kids over age 18.
If your kids make more than $12,550 in a year, they will still pay taxes at the lower rates from the TCJA. This lowers your family's tax bill even more. Also, you can deduct what you pay them as a business expense — lowering your taxable income altogether.
If your child hasn't earned more than $12,550 this year, you might be surprised to know that you should still have them file a tax return.
Reasons are: they can learn about managing their finances and start building their credit history-- both valuable life skills. Depending on the type of business entity you have set up, filing taxes for your employee-child could also save money on payroll taxes.
Exemption from Payroll Taxes
If your business is a sole proprietorship, husband-wife partnership, single-member LLC taxed as a sole proprietorship, or an LLC taxed as a husband-wife partnership. You likely won't have to withhold or pay any Social Security and Medicare tax (FICA) or federal unemployment tax (FUTA) on your kid's wages.
If you're a parent looking to employ your children, this payroll tax exemption is for you. The FICA exemption allows parents to exempt those under the age of 18 from taxes, while the FUTA exemption lasts until they reach 21. This shift in income responsibility can save you a great deal of money come tax time.
Ways To Get Around Payroll Taxes If You Have an S or C Corporation
If your business is set up as an S or C corporation, you don’t qualify for the payroll tax exemption. However, there are ways to get around this restriction by using some creative—yet 100% legal—tax strategies.
For example, you can set up a family management company to pay your kids instead of paying them directly from your corporation. By setting up this new company as a sole proprietorship separate from your primary business and paying your children from it, you won’t have to withhold payroll taxes.
Come speak with us, your Family Business Lawyer™, to learn more about how you can take advantage of tax breaks by paying your kids for their work in the family business.
IRS Compliance
Although multiple people can take advantage of these money-saving tips, some will try to exploit the system by falsely claiming their kids worked more hours than they actually did or by purposely overestimating how much they earned.
To avoid this, the IRS has a few standards your children must meet to qualify for these tax benefits:
- They must perform legitimate work appropriate to their age and skill set.
- Their work must exceed the normal household chores they already do.
- They must be paid reasonably for their services—not overcompensated.
- Good records of their income (including filing W-2s) need to be kept on hand.
- Also, their working conditions and hours should follow federal and state child labor laws
If you want to give your children both valuable work experience and support for your business, here are some jobs they can take over:
- Being models in advertising
- Answering phone calls
- Keeping the office clean
- Washing company cars
- Updating customer lists
- Stuffing mailers and making trips to the post office
- Updating social media posts
- Filing and organizing paperwork And much more!
Schedule an appointment with us, your local Family Business Lawyer™, if you plan to or are currently employing your kids. This consultation will guarantee that you're adhering to the law and protecting your business from any negative feedback or legal trouble from IRS.
Lower your company's tax liability by taking advantage of all the deductions and credits you're entitled to
If you're looking for ways to reduce your tax bill, hiring your children is a great way to start. But it's not the only option—there are many other opportunities out there that can help you save on taxes.
Income taxes are one of the biggest expenses for most businesses, so it's important to take advantage of every opportunity to reduce your tax liability.
Schedule a consultation with us, your Family Business Lawyer™, to ensure you don't overlook any important details.
This article is a service of a Family Business Lawyer™. We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Call us today to schedule.
