Did you know that as a business owner you can reap serious benefits by hiring your children to work for you? There are tax loopholes that can help your business–and your family–save a decent amount of money.
However, there are also laws that must be adhered to when hiring children. The work your kids do for your business has to be applicable to the business. And the pay must be reasonable for the type of work they do.
By knowing the rules for hiring your child, you can ensure both you and your kids take advantage of the potential benefits that can come with hiring your kids in your business.
What Are The Main Benefits Of Hiring Your Children?
Hiring your children to work for your business can be a great tax strategy for both of you. There are money savings involved in hiring your children that you may be unaware of. In addition, there are employee benefits that can help your children get a financial leg up.
You Get To Deduct Their Wages
If your minor child works in your business, you can deduct their salaries or wages from your business income just like you would be able to with a regular employee. This means a lower bottom line and lower paid taxes for you or your business.
Dependents Are Exempt From Payroll Taxes
If your dependent child works for another person’s business, that business will have to pay payroll taxes for your child. However, if your child works for you, you’re exempt from paying Medicare tax, Social Security tax, workers compensation insurance, and federal unemployment tax on their wages.
In fact, you won’t have to pay unemployment tax on your child’s wages until your child is 21. Your child will have to pay federal income taxes, and in some cases state taxes. However, the new higher standard deduction can help minimize those tax amounts too.
Note that the rule of no payroll taxes on your child’s wages only applies if your business is solely owned by you as your child’s parent(s) or guardian, as a sole proprietorship or single member LLC taxed as a disregarded entity.
If you own a corporation you’ll still have to pay payroll taxes for your child. Also, consult your local tax specialist for any potential exclusions to this law related to your individual situation.
At What Age Can You Hire Your Children?
So, if you’ve read the Fair Labor Standards Act (FLSA) rules on child labor, you know that children generally have to be at least 14 years of age to work most jobs. However, that rule doesn’t apply to parents who are business owners and want to hire their children.
In most businesses, you can hire your child at any age as long as it’s a legit job. However, in mining, manufacturing, and other hazardous businesses your child has to be 18 or older to work for you.
How Much Can Your Child Earn Before He Has To Pay Taxes?
Your child can earn up to the current year’s standard deduction before they have to pay taxes. For 2019, the standard deduction number is $12,200.
However, if your child has unearned income such as investment income the rules are different. He or she may have to pay taxes even if they earn less than the standard deduction amount. Again, your tax professional can help you sort out the details.
Can Your Child Earn Retirement Contribution Benefits?
Yes! Your children are eligible for retirement benefits. Any child who has earned income can contribute to an Individual Retirement Account (IRA) up to the IRS limit. For 2019, that contribution limit is $6,000.
Note that your child’s earned income amount must meet or exceed their IRA contribution amount in any given year. You can’t contribute more than you earned to an IRA.
Can Your Child Work For You As An Independent Contractor?
Yes, you can hire your minor child as an independent contractor instead of as a W-2 employee. However, doing so many hinder his or her tax benefits if they earn over $400 in net self-employment income during the year.
For instance, as an Independent Contractor, your child could be liable for self-employment tax. Also, you may have a tough time proving to the IRS that your child indeed meets Independent Contractor status. Most times, the work your child does for your business will be classified as employee work.
This article from the IRS can help you understand family help in your business more thoroughly. You could also check with your tax professional for more details.
See Also: How To Hire An Assistant
What About Child Labor Laws?
The Fair Labor Standards Act mentioned above was introduced in 1938 as a way to protect workers from unscrupulous employers. America was in the height of the Great Depression at the time, and children were being forced to work in unsafe working conditions.
Long hours, low pay, and dangerous work hazards were putting children at risk. For this reason, the FLSA was implemented, in part to protect children. The rules apply via varying age groups:
- Children under 14 years old
- Children ages 14 and 15
- 16 and 17-year-olds
- Children 18 and over
Children under 18 have rules on what hours of the day they can work, how many hours they can work and more. If you click on the FLSA link we talked about in an earlier paragraph, you can get a complete rundown of child labor laws.
As a parent looking to hire your child, all you need to know is that your children are largely exempt from FLSA laws. However, if your business requires hazardous occupation work (working with explosives, coal mining, some motor vehicle involvement) your children may be prohibited from working for you until they’re 18.
Note that agricultural jobs are exempt from this hazardous occupation rule – if you as a parent own the farm your child works on.
Hiring your minor children to work in your business comes with many benefits. You can save loads of money, or you might just find new young talent for your business. That being said, it’s important to have a complete understanding of the laws before hiring your kids.
Note that the IRS will keep a tab on the money you pay to your children. When you hire a minor child, the income you pay them must be:
- Reasonable for the work they’ve been hired to do
- Work that directly benefits your business
In other words, you can’t hire your child as an office assistant and pay them $100 an hour. Additionally, you can’t hire your child to wash the dog when your business is an accounting business.
However, you may be able to pay your child for mowing the lawn where your business resides, or for cleaning your offices. Just be sure that the work your child does benefits the business, and that the pay is reasonable for the services performed.
In addition, tax and labor laws for your individual state matter as well. We suggest contacting your tax accountant to get advice on the best way to hire your children for your business.