If you’re a business owner, hiring your children can be a smart way to reduce your tax liability while teaching them valuable work skills. This strategy not only allows you to shift income to a lower tax bracket but also enables your business to claim a tax deduction for their wages.
Benefits of Hiring Your Children
- Income Shifting: By paying your children a reasonable salary, you can shift income from your higher tax bracket to their lower (or zero) tax bracket, potentially reducing your overall family tax liability.
- Tax-Free Earnings: Children under 18 who earn less than the standard deduction ($14,000 for 2025) can avoid paying federal income tax on their wages.
- Deductible Wages: Wages paid to your children are fully deductible as a business expense, reducing your taxable business income.
- No Payroll Taxes for Sole Proprietors: If your business is a sole proprietorship or a partnership where both partners are parents, wages paid to children under 18 are exempt from Social Security and Medicare taxes.
- Retirement Savings Opportunity: Your children can contribute to a Roth IRA with their earnings, giving them a head start on tax-free retirement savings.
Strategy
To maximize tax savings, ensure the wages paid to your children are reasonable and reflective of the work they perform. Keep detailed records of their hours and tasks to support the deduction in case of an audit. Consider tasks like managing social media, filing, or helping with inventory.
Important Considerations
- Reasonable Compensation: The wages must be reasonable for the work performed. Paying an excessive salary could attract IRS scrutiny.
- Age-Appropriate Tasks: Ensure the work assigned to your children aligns with their age and capabilities.
- Proper Documentation: Issue W-2s and file payroll taxes (if applicable) to maintain compliance with IRS rules.
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