As long as they’re doing legitimate work for your business, you can hire your kids and pay each of them up to $12,000 per year tax-free.
It’s true!
And all of this while they earn a little money AND start saving for college or that first business. And it’s all tax-free.
So you may want to hire your child(ren) to work in your business. And you want to do it for many good reasons: to teach them about entrepreneurship, develop a strong work ethic AND for the tax-free income — up to $12,000 per child.
If they stay under this limit, they don’t even have to file a tax return, which means they don’t pay any income tax on it. And you get to deduct their wages, which lowers your business’ taxable income.
But wait! There’s more!
The IRS ACTUALLY Rewards You For It! (1)
If you have children between the ages of 7 – 22, you can use this strategy to save some money. Here is how it works:
- Each of your children can be employed by your business and paid an annual wage of $12,000. This is an important amount because it is the standard deduction amount for single individuals.
- Your business gets to take a deduction for the payment, thus decreasing your taxable income.
- So the business gets to take a deduction, but the kids pay no federal income tax. It does not get much easier than that!
This strategy can also be combined with IRA and 401k strategies to really maximize the benefit. For instance, if you paid each child $12K each as salary. You could put $6K into an IRA that is deductible, and you can use their standard deduction to take their taxable income to zero.
In that case, your business can deduct $18K per child, but again, no taxable income.
If you want to save money then hire your kids and make sure you have them actually work!
- Keep track of the hours and tasks your children perform and make sure it’s age-appropriate.
- The IRS isn’t going to believe your 5-year-old earned $12,000 analyzing dental records. But that 5-year-old can model those pearly whites in photographs to be used on your website or brochure!
It’s easy to document an “image agreement” that pays an ongoing licensing fee right from the start.
So you DO NOT have to pay payroll taxes for employing your kids if your business is a sole-proprietorship, a single-member LLC taxed as a disregarded entity or an LLC taxed as a partnership and owned solely by you and your spouse.
Using this strategy, rather than just dumping change into their jar, (money you likely paid personal taxes on) you’ve moved those taxable dollars from your tax rate to your child’s tax rate and bracket, which, is zero, and you still keep the money in the family!
There are countless jobs kids can do for you, and remember, you can pay them at the SAME RATE you would pay any other employee or outsourced company.
- Cleaning the office
- Washing company cars
- Updating customer lists on the computer
- Simple to advanced Data-entry
- Transcribing video or audio
- Trips to the post office or general errands
- Helping at the office, passing out handouts, and more
- Walking door to door, placing fliers for your business
- Updating your social media accounts (They won’t even equate this as work!)
But then, let’s say after reading the guide, you find out that this strategy “doesn’t work” if your business is a corporation. Well, we will help you corporations out in the next article!
(1) Source: Publication 929 (2020), Tax Rules for Children and Dependents). https://www.irs.gov/uac/About-Publication-929
(2) Reference: DOL Rules Regarding Youth & Labor https://www.dol.gov/general/topic/youthlabor