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Tax savings from hiring your children

Paying your kids to work for you can provide substantial tax savings.  It also provides your children with an opportunity to learn the business and to see your work ethic.  It can help your child pay for college, or you can put it into their retirement account.

Kids under age 18 who work for their parents are not subject to Social Security and Medicare taxes if the business is taxed as a sole proprietorship or a partnership in which the father and mother are the only partners.  If your business is a single-member LLC and is taxed as a proprietorship or as a spouse-only partnership, you will also be able to take advantage of not paying payroll taxes.  Since corporations don’t qualify as mothers and fathers of the children, they don’t qualify for this tax savings.

The standard deduction for a single person in 2019 is $12,200, so they would not be subject to income taxes until their income exceeded this amount.  Additionally, up to $5,500 can be put into an IRA.  If your child makes more than their standard deduction, putting money into their IRA would increase the amount of tax-free wages.

Child wages are only deductible if the pay is a reasonable amount, actually paid, and based on actual services provided by the child.  There is no minimum age for the child, and the IRS has approved the hiring of a seven-old year in the Eller case.

The kiddie tax is not an issue because it only applies to unearned income.

The Fair Labor Standards Act allows kids younger than 16 who work in a business solely owned by their parents can work at any time of day and for any number of hours.

An employer with employees is required to have an employer ID number if you don’t already have one.  You can apply for an employer ID online on the IRS website.

It’s essential to have your child complete a timesheet daily and turn it in weekly, to avoid having the IRS disallow the wages. 

You should always pay wages using a W-2 payroll check.  You will also need to be able to provide an audit trail from your business checkbook to your child’s bank account since this is now your child’s money.  If you are using a payroll service, be sure to explain your child is exempt from payroll taxes and then check to make sure they are doing it correctly.

It is essential to file all federal and state forms which are required.  The required forms include the W-4, W-2, quarterly Form 941, and annual Form 940.

Failure to fill out all payroll records and forms can have significant consequences.  The IRS can disallow the wage deduction, and you can be required to pay negligence penalties.

David Zubler has an accounting degree and computer science degree and has experience as an accounting manager and controller in manufacturing, and has owned his tax/consulting business since 1990.  David Zubler is the founder and president of Your Tax Care.  The company provides business and tax education to the public at its website, YourTaxCare.com.  David can also be contacted by email at zublerdavid@gmail.com.