Hiring Your Children in Your Business: A Legitimate Tax Strategy
You may have heard people refer to hiring your children in your business as the "family payroll loophole." While the name sounds questionable, this is actually a legitimate tax strategy recognized by the IRS when done correctly.
To qualify, your child must perform real work and be paid a reasonable wage, and the business should maintain proper records.
Why Do Business Owners Do It?
• The wages are generally deductible to the business.
• The child may pay little or no federal income tax if their earnings fall within the standard deduction.
• The family may shift income from a higher tax bracket to a lower one.
Additional Payroll Tax Savings
For sole proprietorships and husband-and-wife partnerships, wages paid to children under age 18 are generally exempt from Social Security and Medicare taxes. Wages paid to children under age 21 are also generally exempt from federal unemployment tax (FUTA).
These exemptions do not generally apply to S corporations.
What Kind of Work Can Children Do?
• Filing and organizing records
• Cleaning the office
• Data entry
• Social media assistance
• Photography or website updates
• Inventory and administrative tasks
The work must be appropriate for the child's age and abilities.
Don't Forget the Roth IRA Opportunity
Because wages are earned income, a child may be eligible to contribute to a Roth IRA, giving them a head start on tax-free retirement savings.
The Bottom Line
Hiring your children can provide legitimate tax savings while teaching valuable work skills and responsibility. The key is making sure the work is real, the pay is reasonable, and the records are properly maintained.
Thinking about hiring your child in your business? Please contact me directly for a free consultation.
The article is meant for informational purposes only. Please contact me directly to discuss how this applies to your individual tax situation.