Interested in making your kids work for your business? Read this first.
When summertime comes and kids are out of school, they’re usually looking for things to do. Don’t want to hear your kid complaining about boredom? Fear not, we have the answer: put them to work for you! That’s right, you can hire your kids to work for your business – and get a tax deduction for it.
What’s the advantage of hiring your kids?
Experience for your kids
There are several advantages to hiring your kids to work for your business. For one, it’s great experience for your kids to participate in your business. Whether it’s fixing bikes or doing dishes, there’s much to be learned from working. If your plan is to pass the business to your child(ren) one day, this is even more important. They will get to see the ins and outs of what you do as a business owner.
Retirement savings for your kids
Another advantage of hiring your kids to work for your business is that they are able to contribute some or all of their income to a retirement savings plan. The contribution is limited to 100% of earnings up to $6,500 (for 2023). If you make sure you are following the rules and paying your child legitimately, a common strategy is to set up a Roth IRA for them, so they can contribute some of their income to a tax-free retirement account.
It’s never too early to help them prepare for retirement. As Albert Einstein said, “compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”
Tax benefit
Tax free income! If the total paid to your kids is under the single standard deduction threshold ($13,850 for 2023) it is not subject to federal income tax at the employee level (assuming they’re not earning income from other sources).
Regardless of whether you have a sole proprietorship, partnership, LLC or corporation, you are able to deduct the wages as a business expenses. However, if you are established as a corporation, the wages earned are subject to the same FICA/FUTA as any other employee.
Rules to follow when hiring your kids
As with all things for your business, there are some rules to follow when you hire your kids to work for your business:
- It must be an age-appropriate job. You probably shouldn’t say that your 7 year old is helping you prepare tax returns.
- Market wage: pay a reasonable wage for the job. Children should not be earning $50 per hour for making photocopies.
- Follow labor laws (& child labor laws) on a federal, state and local level. This one is pretty self-explanatory.
- Run and file appropriate payroll reports and issue a W-2 at year end. If you’re using an outside payroll company (i.e. Gusto), this will all be handled for you.
- Keep documentation for the role and their work (i.e. timesheets and a job description). If you’re ever audited, you’ll be glad you set your child up correctly and have the paperwork to prove it.
Bottom Line
There are many benefits of hiring your kids to work for your business. But, it doesn’t make sense in every situation. Remember, if you’re going to hire your child(ren), you should be a profitable business with a payroll system already in place. Your offspring should be mature enough and capable of performing the assigned job. Lastly, make sure to follow all of the employment, tax, and labor laws that apply.
Have you ever hired one of your kids for your business? How did it go? Is it something you’ll continue in the future? Tell us in the comments below.
More from Numberwise:
2023 tax law changes for business owners
