Are you a parent of minor children who would like to earn some extra money and you could use their help in your business? Are you a sole-proprietor or have a partnership in which each partner is a parent of the child(ren)? Did you know there are tax benefits for employing your own kids?
If you know you will need help over the summer (or longer) and your children are old enough to provide services, consider employing them and benefit from the tax law regarding hiring your minor children.
Normally when you have employees, you must match the amount of Social Security and Medicare tax withheld from them plus pay federal and state unemployment tax as well. When your under age 18 children work in your company, you do not have any tax to match on their earnings, and they also do not pay Social Security, Medicare (and usually) state taxes on what they earn. Technically, they would be subject to income tax deductions, but none is due unless they earn more than the standard deduction ($12,550 in 2021). Their earnings are not subject to unemployment insurance tax either.
Not only will you save on payroll taxes, but the wages you pay are a business expense reducing your profit, and therefore your taxable earnings subject to income tax. If you pay your child $12,000 in 2021, your profit is reduced by this amount. Do you have two children working enough to earn up to the standard deduction? You have expensed $25,100.
Let us say you did have two children earn up to the standard deduction of $12,550 each and you expense $25,100 for wages. And to simplify the math (you pay different rates for levels of income), let us say you have an average federal tax rate of 20%. You would reduce your taxes by $5020 compared to if you had not hired anyone at all. And that does not take into consideration state taxes you would save if you live in a state with income tax.
Things to know about hiring your children:
- You do not have to pay minimum wage as labor laws do not apply to children of owners.
- The work you claim your child performs must be age appropriate – your 8-year-old child probably is not providing customer service on the phone for prospect calls. They are more likely helping with simple administrative tasks like shredding, putting stamps on envelopes, or sweeping.
- You must pay reasonable wages for the work performed. In the example above, you are not paying your child $20 to perform basic duties. You should not pay more than you would pay an outsider to perform the same duties.
- You should have your child track time in a system (whether written timecards or online timekeeping software) to prove hours worked in the event of an audit.
- You do not have to give them all the money they earned in a paycheck. You can deposit some to a bank/savings account where they will not be able spend it, or even use it to offset expenses you pay for them. If they want to go to an amusement park with friends and need $200.00 for their ticket, food, parking, and fun money, you can count what you give them as part of their wages.
If you need help in your business and your children are interested in earning money while helping you, hiring your minor children can have multiple benefits!