As a business owner, you’re always looking for ways to optimize your tax situation. But have you considered hiring your children? Hiring your kids can not only help them learn valuable work skills but can also provide several potential tax benefits. Here’s how:
- Tax Deductions for Your Business: When you hire your children and pay them reasonable wages, you can deduct those wages as a business expense, reducing your overall taxable income. Make sure you hire your children only if they meet the requirements and perform reasonable and legitimate tasks for your business.
- Shift Income to Lower Tax Brackets: By paying your children a wage, you shift some of your family’s income to their potentially lower tax bracket. If your business is a sole proprietorship or partnership (in which each partner is a parent of the child), your child’s wages might not even be subject to Social Security and Medicare taxes (FICA), if they are under the age of 18.
- If the business is a corporation or a partnership (in which only one partner is a parent of the child or none of the partners are parents of the child), then the wages paid for the services performed by the child will be subject to FICA taxes (Social Security and Medicare), income tax withholding, and FUTA (Federal Unemployment Tax Act) taxes, regardless of their age.
- Low or No Tax Liability for Your Child: Your child may not owe much (or any) tax on the income they earn, especially if they stay below the standard deduction threshold ($15,750 in 2025 for a single filer). This means they could earn a considerable amount of money without triggering a tax bill.
- Contributions to Retirement Accounts: If your child earns wages from your business, they may be eligible to contribute to a retirement plan, such as an IRA or a 401(k), depending on the structure of your business. Contributions to these accounts may be tax-deductible, helping both your child build retirement savings and potentially reducing your taxable income.
Important Considerations:
- State Requirements: Review the minimum requirements in the state where you hire for your business to stay in compliance with state laws.
- Legitimate Work: Be sure the work you assign to your children is legitimate and reasonable. The IRS pays close attention to family employment and unsubstantiated wages could trigger penalties.
- Keep Good Records: Document hours worked, tasks completed, and wages paid. It’s essential for compliance and could save you from trouble if you face an audit.
If you would like to learn more about hiring children or family members into your business, we invite you to visit the IRS’ official website for their “Family Employees” publication.