Q: What are the tax benefits of hiring your children?
Business Owner and Parent–
A: Dear Business Owner:
Hiring your children can teach them about entrepreneurship and building a work ethic. It can work out to your benefit, too. Your child’s earnings might be exempt from payroll taxes if your business is unincorporated. Hiring your child also diverts income from your high tax bracket to your child’s lower tax bracket and can result in a business deduction.
To be eligible for the payroll tax exemption, your child must be under 18, and your business must be a sole proprietorship, a single-member LLC, or a partnership. Conversely, children’s earnings from a parent’s corporation (including an S-Corporation) are subject to payroll tax withholding.
If you are incorporated, you can get the payroll tax exemption if you pay your child from a family management company. The family management company must be unincorporated (or a single member LLC or partnership), and that will keep your child off your corporation payroll. Again, this diverts income to your child, which is then taxed at your child’s tax rate.
If you need help structuring your business to minimize your tax liability, start by sitting down with a Creative Business Lawyer®. Your Creative Business Lawyer® can help you structure your business to save time and money.