The Hidden Gem: Exploring the Tax Breaks of Hiring Your Children in Your Business

Did you know that hiring your children can lead to major tax savings for your business? 

If you have a business and you are a sole proprietor or an LLC and you pay your children, you can pay them up to the standard deduction ($13,850 for 2023) WITHOUT needing to pay social security, medicare, or withholding taxes.  Your child can have income up to that standard deduction amount without needing to pay any taxes.  So you as the business owner get the tax deduction and your children do not have taxable income.  

Sound too good to be true?

Let's explore!

This is one of the best kept "secrets" for small business owners.  Let's face it.  Children are expensive.  So why not be smart about how you pay for their expenses?

There are rules behind the deduction, so you need to be aware of the rules.  And with any deduction, be sure to keep your records for documentation.

Get creative and find ways for your children to help you with tasks for your business.  It is important to find "age appropriate" activities that your child can do and pay them a similar wage as you would pay someone else to do that same job.  For example, your 6 year old is not going to be taking phone calls for you, but they can be helping to take out the garbage and helping your label things, etc.  Your teenager may very well be able to help you with your social media.  Document the hours they work and pay them from your business for these activities.  If they are under 18 you don't have to withhold social security or medicare, so you do not need to file a W2.  However, if you are going to set up a retirement plan such as a Roth IRA you will want to issue a W2 to document their earned income. 

I am a big believer in teaching your kids to be responsible, and this is such a great way to do it and teach them business skills at the same time.

What about young adult children?  You can still pay them as you would pay any other employee, but if they are 18 or over you do need to withhold taxes and issue a W2 or issue a 1099 if they are a contractor instead of an employee (different discussion).

If you have an S Corporation or a  C Corporation you may still pay your children, but you just need to withhold payroll taxes and issue a W2 OR you can set up a management company and have the management company pay your children.

The video dives into the details.

Take advantage of this tax benefit this year.  Just know the rules and document, document, document!

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