The following post is by Kim Fourman. Please note that this article is intended to discuss general tax topics. Consult your own tax advisor regarding your specific circumstances.
One of the most overlooked ways for small business owners to save on taxes is by hiring your kids in the business. Here’s how it works:
Consider What Work Can be Done
The first thing to consider when hiring your kids is the work that your child can do. Their work must be age appropriate and must be legitimate work for your business.
For example, having your child do household chores would not count as working for your business, but picking up trash and cleaning up the yard at your rental property would. The IRS has accepted employment by a child as young as seven. You do not run afoul of any federal child labor laws when you employ your own children, but make sure to check with your state department of labor.
You Must Do the Paperwork
When hiring your kids you must keep good documentation, pay your child a reasonable wage, and file the proper forms. Your child must be a true bona fide employee of your business.
This means that you should have them fill out all normal employment paperwork like a W4. You could even have an employment contract that spells out the work to be done and the amount paid. This would strengthen your argument for a true employer/employee relationship in case of an audit.
Your child must also be paid a reasonable wage. The wages paid must be the same that you would pay anyone else to do the same job. A seven-year-old earning $25,000 would probably not pass the kosher test!
Also, you must file all the proper payroll forms, such as Form 941, Form 940 and Forms W-3 and W-2. There also may be additional state required forms.
You will start to see the benefit when you file these forms – a child of a sole proprietor (someone who files on Schedule C) is exempt from Social Security, Medicare, and federal unemployment taxes. Check with your state – they may also be exempt from state unemployment taxes.
Additionally, if you keep their total annual wage below the standard deduction, then the child’s wages would also be exempt from federal income taxes. If the wages are higher than the deduction, then the wages would be taxed at the child’s rate. If your business is a different type of entity, such as an S-Corporation, then check with your tax adviser because the exemptions from payroll taxes differ depending on the type of entity.
The Benefits of Hiring Your Kids
Your child’s wages can go towards a variety of things. You may decide to deposit your child’s wages into a college savings account, or possibly have the money go towards all of those childhood extras – baseball practices, uniforms, summer camp, and the list goes on and on! The money now legally belongs to your child, so of course the money must be used for his or her benefit.
Many parents decide to allow the child to have age-appropriate control over how to use their money. This can be a great avenue for teaching valuable financial lessons on how to handle money.
These lessons learned at an early age will stick with them through adulthood. Not to mention the work ethic learned by working hard for mom and dad. What better way to teach a child about how to be a good employee than to have a mom or dad as their first employer? Take a look here and here for some good reads by Shannon over at The Heavy Purse about how to teach your kids about money.
Questions: Are any of you employing your children in the family business? Did you work for your parents as a child? Would you even consider hiring your kids or do you think it would cause more problems than good?
Author Bio: Kim Fourman is a licensed CPA, working at Loggins, Kern & McCombs, CPAs. Her kids love working in the family rental business, sorta.
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