As a parent and business owner, you’re always looking for ways to optimize your finances while providing opportunities for your family. One savvy tax-saving strategy to consider is hiring your child as an employee in your business. You can pay each child you hire up to $14,600 in 2024 without them owing any federal income tax plus your business can deduct those wages as a business expense.
Not only does this arrangement provide valuable work experience for your child, but it also offers significant tax benefits for your family. In this article, we’ll explore the advantages of hiring your child as an employee and how it can help you save on taxes.
Why Hire Your Child?
- Tax Savings:
- Hiring your child as an employee allows you to shift income from your higher tax bracket to their lower tax bracket, potentially reducing your overall tax liability. Hiring your child as an employee may exempt them from certain employment taxes, such as FICA (Social Security and Medicare taxes), resulting in additional tax savings for your business.
- Business Education:
- Your child gains valuable work experience and business education by participating in the operations of your business. This hands-on learning can be invaluable for their future career development.
- Family Involvement:
- Involving your child in your business fosters a sense of family unity and teaches them important skills such as responsibility, work ethic, and financial literacy.
- Retirement Savings:
- You can contribute to your child’s retirement savings account, such as a Roth IRA, with the income they earn from working in your business, helping them build a nest egg for the future. For example, if your child earns $14,600, they can then contribute up to $7,000 to a ROTH IRA.
Considerations and Requirements:
- Ensure Legitimacy:
- It’s essential to ensure that your child’s employment is legitimate and that they are performing real work for your business. Keep accurate records of their duties, hours worked, and wages paid.
- Consider Restrictions:
- There are limitations on hiring your child as an employee and not everyone fits the bill. Your child must be under 18 for wages to be exempt from Social Security and Medicare taxes. Once they reach 21, you must pay federal unemployment taxes on their wages.
- Pay Fair Wages:
- Pay your child a reasonable wage for the work they perform based on industry standards and the tasks they are responsible for. This helps ensure compliance with tax regulations. The IRS may flag excessive pay.
- Document Everything:
- Maintain thorough documentation of your child’s employment, including employment agreements, timesheets, and payroll records, to substantiate their role in your business.
- Consult with a Tax Professional:
- Before implementing this tax-saving strategy, consult with a tax professional to ensure compliance with tax laws and regulations and to maximize the benefits for your family.
Hiring your child as an employee in your business can be a win-win situation, providing valuable work experience for them while offering significant tax benefits for your family. By shifting income, reducing taxable income through deductible business expenses, and taking advantage of employment tax savings, you can potentially save on taxes while investing in your child’s future.
However, it’s essential to ensure compliance with tax laws and regulations and consult with a tax professional to maximize the benefits of this strategy. With careful planning and execution, hiring your child as an employee can be a smart tax-saving move in 2024 and beyond. To learn more about this topic, please contact your WFY advisor here. You can also sign-up for our newsletter here to receive more updates.
Wright Ford Young & Co. is headquartered in Irvine, CA and is the largest single office CPA firm in Orange County. WFY is a full service corporate accounting firm offering audit, tax, estate and trust, and business consulting services to closely held company and family business owners. More information about our Firm can be found at www.cpa-wfy.com.