Q: Are there any tax benefits to hiring my minor children to work for my business?
A: Dear Pondering
There have always been numerous tax benefits to hiring your children, but the 2017 Tax Cuts and Jobs Act (TCJA) has made those benefits even more valuable.
By hiring your children to do legitimate work for your business, you can deduct their pay from your business income as a business expense. This write-off can not only reduce your company’s federal income taxes, but if applicable, your self-employment and state-income taxes as well.
Plus, the TCJA doubled the standard exemption, so your child can now shelter up to $12,000 of his or her wages from federal income tax. And to maximize that even more, you can put that money into a tax-deferred retirement account for your child.
You may be able to save on payroll taxes, too.
If your child/employee is under 18, you might not be required to withhold or pay any Social Security and Medicare tax (FICA) or federal unemployment tax (FUTA) on their wages. This payroll tax exemption applies for businesses that operate as a sole proprietorship, a single-member LLC taxed as a sole proprietorship, a husband-wife partnership, or an LLC treated as a husband-wife partnership.
If you run an S- or C-corporation, you’ll have to withhold payroll taxes on your children’s wages. However, all of the other tax benefits still apply, and there are strategies available that can allow even these corporate entities to reap similar payroll-tax savings.
If you’re considering hiring your children, contact a Creative Business Lawyer® to discuss all of the benefits available.