If you are a business owner with school-aged children, you may have an opportunity to help your children earn spending money, learn valuable job skills, and lower your taxes. Business owners may employ their children without paying certain payroll taxes. Children may work in their family's business at a far younger age than they could legally work for a non-family-owned company. Here are the benefits that may come from employing your children, as well as what you should know before getting started.
Benefits of Employing Your Children
Here are some potential benefits that may come from employing your child.
You may be able to deduct your child's salary as a business expense,
- If your child is under age 18, you are not required to withhold Social Security or Medicare taxes in some cases1 This provision of IRS rules applies only if your business is a sole proprietorship or a partnership where each partner is a parent of the child. Partnerships, where any partner is not the child's parent, do not qualify for this exemption.4
- If your child is under age 21, their salary or wages are not subject to the Federal Unemployment Tax Act.4
- Your child is not required to pay income taxes on any earnings up to $12,550 (the standard deduction for 2021.2 Wages are subject to income tax withholding unless there is a claim of exempt status. After the standard deduction is applied, any tax withholding may be refunded if the taxable income decreases to zero. 3
This time of life may also be a suitable time for your child to begin contributing to a Roth individual retirement account. Unlike a traditional IRA, where payments go in pretax, and you pay taxes on the withdrawals, a Roth IRA includes post-tax contributions that may grow in value and be withdrawn tax-free. And if your teen is earning well below the standard deduction threshold, they may be able to contribute "post-tax" dollars to a Roth IRA despite having no actual tax liability.3
Getting Started
There are a few important things to keep in mind when hiring your child to work at your business.
First, the pay has to be close to the market rate for the duties performed. Just as you may not pay your child well below the minimum wage without running afoul of labor laws, neither may you pay your child a wage that is far too high for the work they perform.3 If the IRS suspects that you are using your child employee's wages as a way to decrease your business's tax liability unfairly, the IRS may disallow your deductions for your child's wages.4
Under federal law, if you and your child's other parent are the only owners of the business, your child may work in any non-agricultural business at any time of day and for any number of hours, as long as the work is not in mining, manufacturing, or other dangerous or hazardous activities. Also, check your state's child labor laws, which may differ from the federal rules. 3
Finally, this might create an opportunity to start your succession planning. If you hope to have your child take over your family business and there is interest on the child's part in doing this, a written succession plan may be appropriate. This plan may outline your goals for your business and what you would like to happen when it passes on to the next generation.
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1 https://www.forbes.com/sites/winniesun/2019/07/12/kidpreneur-consider-hiring-your-kids-this-summer/?sh=5d5dd3ec63e7
2 https://www.kiplinger.com/taxes/tax-deductions/602223/standard-deduction-for-2021-vs-2020
3 https://www.sba.gov/blog/5-reasons-hire-your-child
4 https://www.irs.gov/businesses/small-businesses-self-employed/family-help