Paying your kids to help out in your family business, whether they're in middle school, high school, or college, has some great perks. It can teach them about hard work, help them learn how to manage money and kickstart their savings for the future. Plus, it keeps more money in the family and out of the hands of Uncle Sam. In return, you get employees who are committed, work well in a team, and are loyal. This might even set the stage for a long-term succession plan for your family business.
Adding to these advantages, bringing your kids into your business can also lead to some helpful tax savings. Thanks to the Tax Cuts and Jobs Act (TCJA), these tax benefits are now bigger than ever. However, it's crucial to ensure that if you hire your kids, they actually do real work, and you pay them fair wages. Otherwise, you might draw unwanted attention from the IRS. Some of the benefits of the TCJA will be expiring in 2025, so make sure to take advantage of these benefits this year while you can. I'll provide more details on this below.
Your Child’s First $13,850 of Earnings Are Tax FREE
The TCJA nearly doubled the standard tax deduction, which increased from $6,300 to $12,550 in 2018 and is now up to $13,850. This means your children will pay zero federal income tax on anything they earn up to $13,850. This tax break alone can save you thousands each year and applies to both minors and those kids over age 18.
Even if your kids make more than $13,850 in a year, they will still pay taxes at the lower rates set by the TCJA, helping to cut down your family's tax bill. Additionally, like with any other employee, you can subtract your child's salary as a business expense, further decreasing your taxable income. Depending on how your business is set up, you might even save a significant amount of money on your child's payroll taxes.
If your child earns less than $13,850 for the year, it's still a good idea to have them file a tax return, especially if they're over 18. This not only gives them a taste of managing money but also helps them start building a credit history.
They May Not Need to Pay Social Security or Medicare Taxes
If your business is a sole proprietorship, a partnership between spouses, a single-member LLC taxed as a sole proprietorship, or an LLC taxed as a partnership between spouses, you may not have to hold back or pay Social Security and Medicare tax (FICA) or federal unemployment tax (FUTA) on your child's earnings.
This exemption from payroll taxes applies to parents who hire their children for either part-time or full-time work. The FICA exemption covers parents with kids under 18, while the FUTA exemption continues until they turn 21.
Taking advantage of this exemption allows you to shift some of the income from your tax bracket to your child's, which is likely much lower than yours.
Don’t Worry Corporations, There’s an Option for You Too
If your business is structured as an S or C corporation, you won't qualify for the exemption from payroll taxes. This means you can still compensate your child through the corporation, but you'll need to deduct taxes from their pay, and they'll have to file a tax return for a refund. However, there are legal and creative tax strategies to navigate around this limitation.
One option is to establish a family management company, have your company pay your family management company, and then pay your children from the family management company instead of directly from your corporation. By setting up this new company as a separate sole proprietorship or LLC (taxes as a sole prop or partnership) for asset protection benefits, distinct from your main business, and paying your kids from it, you can avoid the need to withhold payroll taxes. We can help you get that set up, so give me a call early on this year if you’d like to get it done and ready with enough time to create the benefits for this year.
If you own an S or C corporation, consult with me, your LIFTed Business Advisor, and my network of trusted financial and tax professionals, to explore various strategies that allow you to compensate your kids in your business and still enjoy tax savings.
Stay In Compliance With The IRS
Given the substantial potential savings, it's unavoidable that some individuals might attempt to exploit these provisions by claiming tax benefits without having their kids engage in genuine work or by significantly inflating their wages. To prevent this, the IRS outlines specific criteria for your children to qualify for these tax advantages:
- They must perform genuine work suitable for their age and skill level.
- The work should go beyond routine household chores.
- They should receive fair compensation for their services, avoiding overpayment.
- Maintaining accurate records, including filing W-2s, is essential.
- Their services, working conditions, and hours must comply with federal and state child labor laws.
There are various tasks your kids can undertake for your business, offering them valuable work experience while supporting your company. If you decide to pay your kids, ensure they earn it. Here are some roles they can take on:
- Modeling for advertising
- Handling incoming calls
- Office cleaning
- Washing company vehicles
- Updating customer lists
- Assembling mailers and making trips to the post office
- Managing your company's social media posts
Maximize Your Company’s Tax Savings
With such significant tax savings available, there’s never been a better time to put your kids to work in the family business - especially before some of the tax advantages of the TCJA expire next year. We like to say: pay your kids, not the government. However, hiring your children is just one way you can reduce your yearly tax bill—there are numerous other tax-saving opportunities you might not be aware of.
To LIFT your company’s Legal, Insurance, Financial, and Tax systems so that they serve you in the best way possible, give us a call. We’d be honored to tell you what we can do for your business as your LIFTed Business Advisor.
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This article is a service of a Personal Family Lawyer®. We offer a complete spectrum of legal services for businesses and can help you make the wisest choices with your business throughout life and in the event of your death. We also offer a LIFT Business Breakthrough Session™, which includes a review of all the legal, financial, and tax systems you need for your business. Call us today to schedule.
The content is sourced from Personal Family Lawyer® for use by Personal Family Lawyer® firms, a source believed to be providing accurate information. This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal, or investment advice. If you are seeking legal advice specific to your needs, such advice services must be obtained on your own separate from this educational material.
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