As long as your kids are doing legitimate work for your business you can hire your kids tax free.
hiring your children
How much can I pay my child to work for my business?
As long as they are doing legitimate work for your business, you can hire your child tax-free and pay each of them up to $12,000 per year tax-free.
It’s true. And all of this while they earn a little money AND start saving for college or that first business. It is tax-free.
You may want to hire your child(ren) to work in your business. And you want to do it for many good reasons: to teach them about entrepreneurship, develop a strong work ethic, AND for the tax-free income — up to $12,000 per child.
You can hire your kids and pay each of them up to $12,000 per year tax-free. If you hire your son to stuff envelopes and your daughter to update your website then you can lower your personal income by $24,000! Simply by engaging your children in the family business.
If they stay under this limit, not even have to file a tax return, which means they do not, which means they do not, which means they don’t pay any income tax on it.
And you get to deduct their wages, which lowers your business’ taxable income.
BUT WAIT. THERE'S MORE.
The IRS ACTUALLY Rewards You For It! Source: Publication 929 (2020), Tax Rules for Children and Dependents)
If you have children between the ages of 7 - 22, you can use this strategy to save some money. Here is how it works:
- Each of your children can be employed by your business and paid an annual wage of $12,000. This is an important amount because it is the standard deduction amount for single individuals.
- Your business gets to take a deduction for the payment, thus decreasing your taxable income.
- Your children will then file their own tax return, & since they only made $12,000 they pay no federal income tax because of the standard deduction of $12,000, their taxable income is ZERO.
- So the business gets to take a deduction, but the kids pay no federal income tax. It does not get much easier than that!
This strategy can also be combined with IRA and 401k strategies to really maximize the benefit. For instance, if you paid each child $12K each as salary. You could put $6K into an IRA that is deductible, and you can use their standard deduction to take their taxable income to zero.
In that case, your business can deduct $18K per child, but again, no taxable income.
If you want to save money then hire your kids and make sure you have them actually work!
Keep track of the hours and tasks your children perform and make sure it’s age-appropriate. DOL Rules Regarding Youth & Labor The IRS isn’t going to believe your 5-year-old earned $12,000 analyzing dental records. But that 5-year-old can model those pearly whites in photographs to be used on your website or brochure! It’s easy to document an “image agreement” that pays an ongoing licensing fee right from the start.
So you DO NOT have to pay payroll taxes for employing your kids if your business is a sole-proprietorship, a single-member LLC taxed as a disregarded entity, or an LLC taxed as a partnership and owned solely by you and your spouse
Using this strategy, rather than just dumping change into their jar, (money you likely paid personal taxes on) you’ve moved those taxable dollars from your tax rate to your child’s tax rate and bracket, which, is zero, and you still keep the money in the family!.
There are countless jobs kids can do for you, and remember, you can pay them at the SAME RATE you would pay any other employee or outsourced company.
- Cleaning the office
- Washing company cars
- Updating customer lists on the computer
- Simple to advanced Data-entry
- Transcribing video or audio
- Trips to the post office or general errands
- Helping at the office, passing out handouts, and more
- Walking door to door, placing fliers for your business
- Updating your social media accounts (They won’t even equate this as work!)
But then, let’s say after reading the guide, you find out that this strategy “doesn’t work” if your business is a corporation.
The Corporation “Problem,” and Its Simple Solution to Hire You Kids
There are different rules for different types of businesses. And that when the owners of a corporation hire their child, there are still payroll taxes like FICA to deal with.
We even pointed this out in your free guide. See for yourself:
FICA tax may not have to be withheld on work performed by a child under the age of 18 while employed by a parent in an unincorporated business (sole-proprietorship, single member LLC or a partnership where the only partners are the child’s parents). However, there is no FICA or FUTA exemption for employing a child in an incorporated business (S or C Corp) or in a partnership that includes non-parent partners. In these cases, the children are subject to the same withholding rules that apply to all other employees.
So you DO NOT have to pay payroll taxes for employing your kids if your business is a sole-proprietorship, a single-member LLC taxed as a disregarded entity, or an LLC taxed as a partnership and owned solely by you and your spouse.
But if your business is a corporation, the IRS’s rules are clear. You must pay payroll taxes on income given to your children.
So are you stuck if your small business is set up as an S or C Corp? Or if you’re planning on switching to an S Corp like we normally recommend for maximum tax advantages?
Well, it turns out there is a workaround.
As one high-profile tax strategist says: in order to lower your tax, just change the facts.
Here’s how to do it:
The Payroll Tax Workaround to Hire Your Kids
If your business is set up as an S or a C corporation, or as a partnership with other non-parent partners, the IRS says you have to withhold payroll taxes when employing your kids.
But there is a way to get around this restriction utilizing a little creativity and a “hybrid” approach.
Instead of paying your children directly from your S Corp, you pay them out of a family management company.
You can create this simple family management company as a Sole Proprietorship separate from your S Corp, and owned by yourself or your spouse.
Its only purpose is to support the operations of your Corporation, which can include the scheduling and monitoring of jobs done by your child(ren) — and all the bookkeeping and documentation necessary to keep the jobs within IRS standards.
The family management company charges the Corporation a management fee for these services and can then pay your child — which removes them from your corporate payroll.
And since the family management company is a Sole Proprietorship owned by a parent, you, or your spouse, it falls under the IRS exemption where payroll taxes don’t have to be withheld.
By following this workaround, you’ve found a way to truly pay your kids $12,000 per year tax-free using nothing but the IRS’s own rules.
For more tax-saving tips check out how my blog on Tax Deductions VS Tax Credits! Then put on your HR hat, because you've got some little new hires to train!