“Should I hire my kids?”
Creative tax savings strategies for business owners
Many of my clients are business owners looking for creative ways to save on taxes.
Often they ask me:
“Should I hire my kids”
My answer:
“Probably… but it depends”
Here is what you need to know about employing your children.
How it works
If your child is seeking gainful employment, and you own a business, then surely you can hire them and pay them a reasonable wage.
That wage is tax free to your child as long as it is less than or equal to the standard deduction ($14,600).
That wage is also a business expense which reduces your business’ taxable income.
When done properly this is a win-win for child and parent, as their kid gets paid and the business pays less in taxes.
What to avoid
Not giving them a real job — you cannot hire them to mow the lawn or take out the trash… they must perform work necessary to your business.
Paying them too much — their pay must be on par with what you’d pay any other non-relative employee… you cannot jack up their salary to “keep it in the family.”
Not keeping records/following the rules — seems obvious but you need to maintain good records for your child as you would any other employee.
In practice
You run a social media consulting company and hire your 16 year old daughter to manage your Instagram.
You pay her to work part time (20 hours per week) for $14/hour — she’ll make $14,600 yearly.
Since the $14,600 is equal to her standard deduction she will not owe taxes on those earnings.
The $14,600 is also considered a business expense and will reduce its taxable income.
Lastly since your daughter is under the age of 18 she’s not eligible for Social Security and Medicare (FICA) taxes saving you an additional $1,116.90 on payroll.
Other considerations?
If your child has earned income outside of the business, they may unintentionally generate taxable earnings — as long as you can keep their total income (from all sources) under $14,600 you’re golden.
Once your child is 18+ FICA taxes (Social Security/Medicare) become active (for the business and the kid)… once they’re 21+ Federal Unemployment Taxes are added as well.
If your business is a corporation (S Corp included) or has non-parental ownership (any of the owners are not a parent) then FICA taxes are due no matter what.
Cheers