It can be frustrating when your children complain about having nothing to do — especially during the summer. So, why not hire your child or your children to work for your business? Doing so can keep them productive and teach valuable skills while potentially lowering your tax bill. However, as you probably would guess, there are important IRS rules to follow.
Here’s what you need to know.
Tax Benefits of Hiring Your Child
- If you follow IRS rules, hiring your child to work for your business can lower your taxable income as you can deduct their salaries from your business income.
- If your child is under 18, and depending on the type of business you have (more on that below) you won’t have to take Social Security and Medicare taxes from their pay.
- Your child won’t have to pay taxes if their income for a given tax year is less than the standard deduction amount for that year (e.g., $13,850 for 2023).
- Because your child will have earned income, you can contribute to an IRA on their behalf subject to applicable IRA contribution limits.
Hiring Your Child: IRS Rules
Real Work for Real Wages. If you want to save on taxes by hiring your children to work for your business, their work must be genuine and paid fairly. Your child must truly be working for your business. (You don’t want to draw IRS scrutiny by pretending your child worked for you when they didn’t.)
It’s also important to select appropriate work that is legitimate for your business. For instance, a task like making beds at home, which you may think of as a family chore for your child, wouldn’t be considered legitimate work for your business.
- Provide work that is beneficial, fitting, and recognized in your industry. It doesn’t have to be elaborate.
- Tasks that your child might consider easy to do like adding data to a spreadsheet or posting to social media accounts can be useful for your business.
The work involved must be age appropriate. If your child is skilled in a particular area, it might be helpful to have them help with tasks related to that skill. For instance, if your 11-year-old excels at math and loves numbers, they might review expense calculations or verify invoices. However, if your 8-year-old doesn’t know the medical field, it wouldn’t make sense for them to review medical claims for you.
On the other hand, if your 7-year-old loves to push a Swiffer and wipe keyboards or monitors with a microfiber cloth, hiring them to handle those tasks for your business office could be age appropriate. (Keep in mind, however, that from a tax perspective, it could be difficult to justify a really young child doing office work.)
Reasonable Compensation. When hiring your children to work for your business, it is important to compensate them fairly. Doing so can also help reduce your tax liability, since you are essentially shifting some of your business income to your kids.
- Paying your child a wage similar to what you would pay a worker who performs similar services is recommended.
- If you’re unsure about a fair wage for certain work, consulting with colleagues or staffing agencies might help. Websites that list comparable salaries can be useful as well.
However, it is important not to overpay your child for the work they perform for your business. For example, the 7-year-old who helps dust your office wouldn’t realistically make $30 an hour. But that $30/hour rate might be industry standard for your 15-year-old who designs necklaces for your online accessory business.
Claiming an unrealistic wage for the work your child performs for your business could raise a red flag with the IRS.
Different Tax Rules for Different Business Types
When you hire your child to work for your business, the applicable taxes may vary depending on your business type. Regardless of age, however, payments to your child for work are subject to income tax withholding.
Note: If your business is a corporation, partnership (not as described above), or estate, payments to your child are subject to income tax withholding, Social Security, Medicare, and FUTA taxes, regardless of the child’s age.
Follow Laws and Document Everything
As a parent hiring your child, you are an employer and so must follow employment and labor laws. According to the Department of Labor, “children are generally permitted to work for businesses entirely owned by their parents.”
But still pay attention to Federal and state child labor laws. For example, Federal child labor laws prohibit children under certain ages from working in certain occupations and all children from working in hazardous conditions.
From a tax standpoint, fill out necessary forms such as the W4 with proper Social Security numbers and EINs (Employer Identification Numbers). Issue a Form W2 to document your child’s pay. Also, document your child’s work hours and include dates and detailed descriptions of tasks performed.
If your child is over 18 and you are treating them as an independent contractor, have a signed contract that outlines their work responsibilities and issue a 1099-NEC as required.
And, if you are unsure about IRS requirements for hiring your kid to work for your business, consult a trusted finance or tax professional.