Save on Taxes By Hiring Your Kids!

Hiring your Children 

Consider providing your child with valuable work experience while benefiting from significant tax savings by hiring your child to work for your business. Let's break it down with a real-life example. 

Example Scenario: 

Jane Smith, a small business owner, hired her 13-year-old child to work in her Schedule C business. By paying her child $14,600 in 2024, Jane secured a tax deduction for her business and ensured her child could earn money without paying any federal taxes. 

Zero Taxes for the Child: 

Jane's child pays zero federal taxes on the earned income due to the standard deduction, which has increased to $14,600 in 2024. This presents a fantastic opportunity for parents to reduce their taxable income while giving their children a meaningful role in the family business. 

By paying her child $14,600 in wages, Jane's child now has tax-free money, and Jane receives significant tax benefits. The family keeps all the money—$14,600 plus the tax savings from deducting those wages. 

What Makes the Child's Taxes Zero? 

The standard deduction protects the first $14,600 of a child's income from federal taxes. If your child earns $14,600 or less, they won't owe any federal income taxes. State taxes work similarly in that if the amount paid to your child is less than the state’s standard deduction, then no state tax return is required. However, this varies from state to state. 
 
For instance, in Maryland, the state standard deduction is $2,400. If you pay your child $14,000, your child wouldn't owe any federal taxes but would need to file a state tax return and pay state taxes on $11,600, which still may be worth it! 

Why Hire Your Child? 

- Hiring your child offers multiple advantages: 

• Trust and Reliability: You're working with someone you know and trust. 

• Tax Benefits: Instead of gifting money to your child (which comes from after-tax dollars), hiring them allows you to deduct their wages as a business expense. 

• Retirement Savings: Your child can contribute to a Roth or traditional IRA with their earned income, setting them up for future financial success. If they choose a Roth IRA, their money grows tax-free, and they can withdraw it penalty-free for qualified education expenses. 

- Age-Appropriate Tasks for Hiring Kids: 

When hiring your child, assigning tasks suitable for their age and abilities is essential. Here are some age-appropriate job ideas that benefit your business while providing your child with valuable skills and experience: 

- Let's say you pay more, for example, $21,175 

Jane wants to pay her child more, perhaps $21,175. Here's how it could work: 

• IRA Contributions: The child can contribute $6,500 to a tax-deductible traditional IRA, reducing their taxable income. 

• Standard Deduction: The remaining $14,600 is covered by the standard deduction. 

• Taxes: The child's federal tax liability is minimal, ensuring most of the income remains within the family. 

Jane benefits from substantial tax savings when paying for her child. For instance, by paying her child $21,175, she saves on self-employment tax and other income taxes, which could amount to over $10,000 in after-tax cash. 

- Payroll Tax Exemptions 

One significant advantage of hiring your child is that wages paid to children under 18 are not subject to Social Security, Medicare, or federal unemployment taxes. 

- Corporate Considerations 

Suppose you operate your business as a corporation. In that case, the tax benefits of hiring your child are slightly less due to payroll taxes. However, it's still a viable strategy for reducing taxable income and supporting your child financially. 

- The Kiddie Tax 

Remember, the kiddie tax does not apply to earned income—only unearned income. So, wages from your business are not subject to this tax. 

- How Young Can the Child Be? 

Tax law doesn't specify a minimum age for employing your child. The IRS has even allowed deductions for hiring children as young as seven, as long as the compensation is reasonable for the work performed. 

- Child Labor Laws 

When employing your child, be mindful of labor laws, which generally exempt family-owned businesses from many restrictions. However, certain hazardous occupations are still off-limits. 

- Ensuring Compliance 

To avoid issues with the IRS: 

- Planning Tip 

Make sure you promptly pay a reasonable wage based on a timesheet submitted. Proper documentation is crucial to substantiate the business expense and avoid disputes with the IRS. 

Build Audit-Proof Support 

Do the Paperwork or End Up Like This Lawyer Mom 

Adherence to documentation requirements can lead to significant issues. Lisa Fisher, a lawyer, lost substantial wage deductions and faced penalties because she neglected to: 

Choice of Entity Consideration 

The difference in tax benefits when hiring your children can influence your choice of business entity: 

- Takeaways 

Suppose your children do not pay income taxes as you read this. In that case, they are excellent candidates as employees for your business regardless of business form:

- Summary of Benefits 

• Financial Growth: The family retains all the money—$14,600 in wages plus significant tax savings. 

• Skill Development: Children gain valuable work experience and develop essential skills. 

• Tax Efficiency: Maximizes deductions and minimizes taxable income for the business and the child. 

Final Thoughts 

Hiring your child is a powerful strategy that offers both tax benefits and the opportunity to instill a strong work ethic in your child. By following the guidelines, assigning age-appropriate tasks, and keeping detailed records, you can maximize these benefits while avoiding pitfalls like Lisa Fisher, who lost her deductions due to poor documentation and not implementing the strategy correctly. 

If your children are not paying income taxes, hiring them could be good for your business, and who knows, they may be inspired to take over one day.