The Untold Benefits of Hiring Your Kids in Your Business

Posted on November 01, 2023

Hiring your kids is one of the top kept tax saving secrets.

Now when we start this conversation with clients a lot of people cringe and think this is something that the IRS surely would not allow. However, that is not the case. This is actually discussed directly in the tax code. However, it must be done correctly in order for it to be legal.

We have actually had some lengthy conversations on this in our Free Facebook Group so thought it would be a great topic to write on!

What Do I Need To Know About Hiring My Kids In My Business?

Get a business deduction and your kids potentially pay no tax on that income.

  • IRS Website
    • “Payments for the services of a child under age 18 who works for his or her parent in a trade or business are not subject to social security and Medicare taxes if the trade or business is a sole proprietorship or a partnership in which each partner is a parent of the child.”
    • Pay your child through a sole prop or partnership, no need to withhold social security, medicare, FUTA, etc if your child is under 18.
  • Benefits
    • You get a business deduction for items you are typically paying personally anyways.
    • You child can claim the standard deduction (up to $13,850) in 2023, so the first $13,850 would be tax fee at the federal level and then any income above that would be taxed starting in the lowest tax bracket.
    • You are likely paying for your child’s basketball camps, entertainment, technology, etc so why not get a business deduction for these items you are going to pay for anyway?

Great, Now How Do I Do It? 

In order for this to be legal and stand up against the IRS, it must be done correctly! You cannot just pay your kids a set amount out of your business without any backup.

  • The Details
    • Must be age 7+ – This is an age that has been proven in tax court.
    • Must pay a reasonable wage for the type of work they are doing in the business.
    • Track time to record the actual work they are doing to support the deduction.
    • Pay to an account in the child’s name.
    • Prepare a W2 at year-end
    • Have required documentation: job description, employment agreement, hour/task tracking, payment proof, W2, etc. In TaxElm we have a full implementation guide with all of these documents. Check that out here!
  • Potential Issues or Planning Opportunities
    • S Corporation
      • If you operate as an S Corp you are not considered a sole prop or partnership so you WOULD need to be withholding social security, medicare, etc from the payments. This would all of course still be considered a business expense, just some additional tax. In TaxElm, we discuss some work arounds for this “problem”.
    • Non Child Family Members
      • Think grandchildren, nieces, nephews, etc. If you wanted to hire family members in this area they would not be your direct children so the social security and medicare avoidance would not be applicable. Here too there are some potential work arounds that we walk through in TaxElm.

As mentioned, this is a tax strategy you do not want to miss out on. What a great opportunity to get a business deduction and have your children potentially pay no taxes on that income.

Now of course you need to make sure you are doing things correctly to cover you in an IRS audit but that is something that can easily be done as we discussed here.

For more details on this along with additional training and tax strategies to ensure you are paying the least amount in taxes as legally possible, check out TaxElm!

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