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How to Save Money and Cut Taxes by Hiring Your Kids

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.

hiring your kids

Boy at a weaving station – circa 1908

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.

Image courtesy of Lewis Hine at Wikimedia Commons

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Comments

  1. This is a really interesting strategy to save for your kids. It could be really successful and save tons come tax season. Thanks for sharing!

  2. Ryan @ Impersonal Finance says:

    Very interesting. Seems like this is a win-win. Your kid gets money and learns a lesson, you get some work done and a tax break? Very nice! I’m going to have to keep it in mind for the day down the road when I have kids I can hire.

  3. I think this would be a great way to teach children about money along with hard work.

  4. Hmm this is quite the idea! I don’t have children and my parents never employed me, but it’s definitely something I would consider, and not just for the tax benefits. It would be a good experience for them I think and would teach them the value of a dollar at a relatively young age.

    • It works well for sole proprietors or owners of a single member LLC. Once you get into entities taxed as partnerships and corporations, the tax benefits are a little different, but the work ethic and value of money lessons to the kids remain.

  5. Thanks for the mention, Kim – I appreciate it! Great tips and I need to consider putting the girls are the payrolll. 🙂 I have no doubt that i could find something for them to do! But it is a great way for kids to earn money and learn how to handle it while parents enjoy the benefits of hopefully lower taxes. I hope you are surviving your second winter blast okay. 🙂

    • You are welcome, Shannon — I think the tax benefits are secondary to the life lessons that you can teach to your kids about how to handle money. I also like the little lesson in there that work —> money.

  6. Definitely a really interesting approach. I’ll have to see what kinds of work the IRS will let my 2-month-old do!

  7. Laurie @thefrugalfarmer says:

    Irony here, Kim!! We were just talking about this yesterday, about putting our oldest on the blog payroll, as there’s lots of techy stuff I don’t know how to do that she can, and she wants stuff like a laptop that is out of our spending range right now. Wonderful timing on this, and now we know how to do it legally. Thank you!

    • Yup, it works great. When you are a sole proprietor, your net income is subject to SE tax (Social Security and Medicare). When you pay your child, that amount of money is an expense to the business, so it lowers your net income by that amount. And then on her side, she’s not subject to the SE tax since she is your child, so there’s 15.3% of payroll tax that you’ve avoided. When you do the 941, put her gross salary on line 2, and then check the box on line 4. We also usually write in “wages paid to child of sole proprietor” right underneath the checkbox.

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