Hire Your Children to Save Taxes for Your Business and Your Family

father and child working together

It can be difficult in the current job market for students and recent graduates to find summer or full-time jobs. Are you a business owner with children in this situation? If yes, you may be able to provide them with valuable experience and income while generating tax savings for both your business and your family overall. Here is a further look into hiring family members and how much you can pay your child tax free 2018.

Shifting Income

There are benefits to doing child employment by parents. This includes shifting some of your business earnings to a child as wages for services performed by him or her, and turning some of your high-taxed income into tax-free or low-taxed income. Are you looking to get your business to deduct the wages as a business expense? If so, then the work done by the child must be legitimate and the child’s wages must be reasonable.

Here’s an example of how this works: A business owner operating as a sole proprietor is in the 39.6% tax bracket. He hires his 17-year-old son to help with office work full-time during the summer and part-time into the fall. Upon hiring for summer employment, the son earns $6,100 during the year and doesn’t have any other earnings.

The business owner saves $2,415.60 (39.6% of $6,100) in income taxes at no tax cost to his son. Additionally, the con can then use his $6,350 standard deduction (for 2017) to completely shelter his earnings. The business owner can save an additional $2,178 in taxes if he keeps his son on the payroll longer and pays him an additional $5,500. The son can shelter the additional income from tax by making a tax-deductible contribution to his own IRA.

Family taxes will be cut even if the employee-child’s earnings exceed his or her standard deduction and IRA deduction. That’s because the unsheltered earnings will be taxed to the child beginning at a rate of 10% instead of being taxed at the parent’s higher rate.

Saving Employment Taxes

If your business isn’t incorporated or a partnership that includes non-parent partners, you might also save some employment tax dollars. The IRS does not consider services from a child under the age of 18 while working for a parent to be employment. This exemption applies to both, FICA tax and federal unemployment tax (FUTA) purposes. It exempts earnings paid to a child under age 21 while employed by his or her parent.

If you have questions about how these rules apply in your particular situation or would like to learn about other family-related tax-saving strategies, contact us.