A Family Affair – How to Save by Hiring Your Kids

For small business owners with kids, the most often forgotten deduction is sleeping in the next room: your children. Sure, you deduct them as a dependent, but if that’s the only tax savings you’re getting, you’re missing out.

Here’s the thing. As a business owner, you can legally hire your children and avoid paying many of the taxes that go along with having an employee. Things like income tax withholding are not required for the underage children of the business owner unless you are a corporation. Sole proprietors and LLCs do not have to deal with payroll, even though technically your child is an employee. You also don’t have to cover them on your worker’s compensation insurance.

Even better, your kids don’t have to pay income tax on the money they earn. To a point, anyway.

All that said, though, there are a few rules you have to follow.

Work, not Just Chores

You have to be careful that your kids are actually working in the business. Things like raking leaves and doing dishes won’t qualify – unless your business is a lawn service or a restaurant, that is. Instead, have them do tasks you would normally either do yourself or hire outside help to handle.

Depending on the ages of your kids, such tasks might include:

•     Internet research

•     Video editing

•     Site updates

•     Basic graphic design

•     Addressing envelopes

•     Simple bookkeeping

You will also need to be able to show proof of hours worked, and that the pay was reasonable. In other words, you can’t pay your child $50 an hour for a job that – if anyone else were to do it – would normally pay $10 an hour. Set up a timesheet, and make sure he or she fills it out and turns it in every pay period, so you can have it on file.

Paying Your Kids

Each pay period, you’ll pay your children just as you would any other employee or contractor. As we already said, there’s no payroll tax or other deductions to worry about, so they get paid everything they earned. Even better, your business can claim the expense.

What about income tax? Your kids (and everyone else, for that matter) can earn up to $5,950 tax free. That’s the standard deduction, and it applies whether you pay your child or a total stranger, so it just makes sense to keep that money in the family if you can.

Not only that, but since you’re the parent, you still get to claim your kids as dependents. So your kids earn money tax free (which is a great way to start teaching them about budgeting, etc.), your business claims the expense without worrying about payroll taxes, and you claim the deduction. It’s a perfect system for getting work done while at the same time saving a substantial amount of money on taxes every year.