The Tax Benefits of Hiring Your Children: A Guide For Parents

Hiring your children is one of the smartest tax strategies for small-medium sized business owners. It’s not just about saving money; it’s also an opportunity to teach your kids about the value of work, responsibility, and managing finances.

This guide will walk you through the key benefits, tax rules, practical steps, and some often-overlooked advantages of hiring your children. You’ll learn how this strategy can be a win-win for your family and your business.

Why Hiring Your Kids is a Great Idea

Running a business comes with plenty of challenges, but it also opens doors to creative ways to manage expenses and reduce taxes. Hiring your children is one of those strategies that benefits everyone.

Instead of paying someone outside your family, you can pay your child for the work they do in your business. The money stays in the family, and there are some major tax perks to enjoy as well. Plus, your kids gain important life skills, from learning the value of money to understanding how businesses operate.

This isn’t about taking shortcuts or breaking rules. The IRS allows and even encourages family businesses to hire their kids—as long as it’s done correctly.

The Tax Perks of Hiring Your Kids

1. Using the Standard Deduction

When your child earns money, they can take advantage of the standard deduction to reduce or eliminate federal income tax. For 2024, the standard deduction for single filers is $13,850. This means your child can earn up to that amount without paying federal income tax.

2. Shifting Income to Lower Tax Brackets

As a business owner, your income might fall into a higher tax bracket. By paying your kids from your business, you move a portion of that income into their much lower (or zero) tax bracket. This strategy is called income shifting, and it can significantly reduce your family’s overall tax bill.

For example, instead of paying taxes on $15,000 at a rate of 24-35%, you might pay your child that same amount, with them paying little or no tax.

3. Payroll Tax Savings for Self-Employed Parents

If you’re self-employed and run your business as a sole proprietorship or a partnership where only you and your spouse are partners, you don’t have to pay Social Security or Medicare taxes on your child’s wages until they turn 18.

This means you save the 15.3% payroll tax that you’d normally pay for other employees. However, this exemption doesn’t apply to S corporations. If your business is an S corp, your child’s wages are subject to FICA taxes, but you can still benefit from income shifting and the standard deduction.

If you have an S corporation, contact us about how to structure child wages to obtain both the income and payroll tax benefits.

4. Business Expense Deduction

Your child’s wages are deductible as a business expense, just like any other employee’s wages. This reduces your taxable business income, further lowering your overall tax liability.

The Work Your Children Can Do

Hiring your kids isn’t just about the tax benefits; it’s about having them perform meaningful work that adds value to your business. The IRS requires that any work they do must be reasonable for their age and skills. Here are some examples of tasks they might perform:

Administrative Work

• Filing paperwork
• Answering phones or emails
• Organizing records

Marketing Help

• Managing social media accounts like Instagram or TikTok
• Creating posts or videos
• Designing flyers
• Name, image and likeness contracts

Labour-Intensive Jobs

• Cleaning your office or workspace
• Stocking shelves or supplies
• Packing and shipping products

Creative Roles

• Designing marketing materials
• Editing photos or videos
• Helping with website updates

Make sure the tasks are appropriate for their age and abilities. For younger children, simple tasks like organizing supplies may be better, while teenagers can handle more complex responsibilities like creating content or assisting with customer engagement.

Staying Compliant: Follow the Rules

While paying your kids from your business has great benefits, the IRS expects you to follow certain rules. Failing to do so can result in penalties or audits. Here’s how to stay compliant:

1. Document Everything

Treat your child like any other employee. Complete all required forms, including:

• W-4 (Employee’s Withholding Certificate)
• I-9 (Employment Eligibility Verification)

2. Track Their Work Hours

Keep a detailed log of the hours your child works and the specific tasks they complete. A simple time sheet or app can help with this.

3. Pay Your Child a Fair Wage

Your child’s pay must align with the market rate for the work they perform. Overpaying them can raise red flags with the IRS.

4. Issue Payroll and Tax Forms

Use payroll software to ensure payments are properly recorded. At the end of the year, issue your child a W-2 form just like any other employee.

5. Keep Evidence of Work

Save tangible proof that work was completed. For example, keep copies of flyers they designed or photos of the cleaned office.

6. Other Regulations

Abide by federal labor, state labor, and workmen’s compensation regulations and be aware of family employment exemptions.

Teaching Your Kids About Money

Hiring your kids isn’t just about lowering taxes. It’s a chance to teach them valuable financial skills that will benefit them for life.

Open a Roth IRA

If your child earns income, they can contribute to a Roth IRA. This account allows their earnings to grow tax-free, giving them a massive financial head start. Even small contributions can turn into significant savings over time thanks to compound interest.

Teach Budgeting

Show your child how to save a portion of their income for future goals. Help them create a simple budget and set spending priorities.

Discuss Long-Term Goals

Talk to your kids about the importance of saving for things like university, buying a car, or even starting their own business someday (or taking over your business).

Common Mistakes to Avoid

While this tax strategy offers plenty of benefits, there are pitfalls to watch out for:

• Overpaying Your Child: Paying them more than market rates can attract IRS scrutiny.
• Skipping Proper Documentation: Always have the right forms and records in place.
• Assigning Non-Business Tasks: Only pay for work directly related to your business, not household chores.
• Ignoring Labour Laws: Make sure the work complies with state and federal child labour laws.

Is This Strategy Right for Your Family?

Hiring your children works best if:

• You run a small business or are self-employed.
• Your child is old enough to contribute meaningful work.
• You’re looking for ways to reduce your family’s overall tax bill.

If your kids are willing to work and your business can benefit from their help, this is a setup worth considering.

Final Thoughts

Hiring your kids is more than just a tax-saving strategy. It’s a way to teach them valuable skills and improve your business operations. But it’s essential to follow the rules. Proper documentation, fair pay, and compliance with labour laws are essential. To find out more, consult a CPA or tax professional. Here at Drilldown Solution, we can guide you through the process and help you maximize the tax benefits for your business.

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