Did you know that if you hire your child to work at your business you get a business tax deduction? This includes deductions on your federal income tax bill, your self-employment tax bill, and your state income tax bill. In the long run, you could save quite a bit of money by getting your children to work in the shop.
First it’s important to know that with the IRS, there is no free lunch. If you hire your children, they’re still going to have to pay the standard payroll taxes and potentially file a return. The exceptions are the Social Security & Medicare and the FUTA payroll taxes — these do not kick in until the age of 18 and 21, respectively.
This plan works because the IRS allows many business owners to deduct wages paid out to family members. As with everything at the IRS, the rules are complex, so here are a two official pages for your reference:
The takeaway of these documents is that it’s possible for a business owner to employ a child and deduct up to $12,000 in wages paid to that child. Why $12,000? A wage of $12,000 gets wiped out in one fell swoop with the standard deduction, leaving your kid with zero tax liability and therefore no tax return to file. Your family unit is stronger, and now you have a very profitable employee with some good parents.
This is a great opportunity for business owners who have kids old enough to work. It’s a good place to teach them responsibility about working and responsibility of having income and save yourself some money in the long run. A win-win situation!
Of course, there are still 50 states in the Union, and they all have their own laws that are relevant to their tax schemes. In the new year, I’ll be looking into what Connecticut and New York have to say about employing family members. If you have any questions or need a great referral to an accountant, contact us.