Do you own a business and have your kids help out when they’re not in school? If you file a Schedule C, you could be saving money by hiring your own children.
If your business is a sole proprietorship, an LLC filing taxes as a sole proprietorship, or a partnership with the other parent of your child, wages paid to your kids are exempt from Social Security, Medicare, and federal unemployment (FUTA) taxes until they reach age 18, with the exemption from FUTA taxes extending until age 21. Up to $12,950 in wages to your dependent child can be sheltered from federal income tax, which also reduces your self-employment, federal, and state income tax bills. To qualify, be sure the pay is reasonable and the work is appropriate for the age of your child. You must also comply with federal and state labor laws.
What if your business is a corporation? Your child will still be able to shelter up to $12,950 in wages under the standard deduction, and you can deduct their wages as a business expense. There is also the option to pay your child via a management company set up as a sole-proprietorship. Your corporation would pay a fee to the management company, and you would then pay your child from the sole proprietorship or single-member LLC management company.
Another benefit of hiring your child is the opportunity for them to invest or save their tax-free earnings. Your child can legally invest their earnings in a Roth IRA, which allows for penalty-free withdrawals (of contributions only) at any time before retirement age.
Want more help with this and other ways to reduce your tax bills? Reach out to Specialty Bookkeepers & Tax for business tax prep and strategy.