Get Updates
May 16, 2024 •HoganTaylor
As a small business owner, the decision to hire your children for summer jobs isn't just about giving them a taste of the working world—it's also a strategic move that can yield significant tax breaks and other valuable benefits. By bringing your kids into the fold, you not only provide them with valuable on-the-job experience and the opportunity to save for college but also open avenues for shifting high-taxed income into tax-free or low-taxed income. Additionally, depending on your business entity and your child's age, you may realize payroll tax savings. And let's not forget the priceless benefit of spending quality time with your children while they contribute to your business's success.
When you hire your child, you're not just giving them a summer gig—you're creating a legitimate employment opportunity that comes with tangible tax advantages. Your business can claim a tax deduction for your child's wages, reducing your federal income tax bill, self-employment tax bill (if applicable), and state income tax bill (if applicable). However, for these deductions to stand, the work your child performs must be genuine, and their salary must be reasonable.
For instance, let's say you're a sole proprietor in the 37% tax bracket, and you hire your 16-year-old daughter to assist with office tasks full-time during the summer and part-time in the fall. If she earns $10,000 in 2024 and has no other income, you could save $3,700 (37% of $10,000) in income taxes. This tax benefit comes at no cost to your daughter, as she can utilize her $14,600 standard deduction for 2024 to entirely shield her earnings. Even if her earnings surpass her standard deduction, any unsheltered income will be taxed at her lower rate, providing further tax relief for your family.
If your business isn't incorporated, your child's wages may be exempt from Social Security, Medicare, and federal unemployment taxes, provided they meet certain conditions. Generally, this exemption applies if your child is under age 18 (or under age 21 for federal unemployment tax). However, if your business is incorporated or a partnership involving nonparent partners, no exemption applies, and income tax withholding is required for your child's services, regardless of their age or your business type.
While hiring your child can offer substantial tax advantages, it's crucial to maintain meticulous records to substantiate their hours worked and duties performed. Treat your child's employment with the same diligence as any other employee, including issuing them a Form W-2 at year-end. If you have questions about how these rules apply to your specific circumstances, don't hesitate to seek professional guidance.
Encouraging your child to save for retirement early can lay the foundation for long-term financial security. Income earned from a job enables them to contribute to a traditional or Roth IRA, with contributions capped at the lesser of their earned income or $7,000 for the 2024 tax year. Additionally, if your business offers a retirement plan, your child may qualify to start earning retirement benefits, setting them on a path towards financial independence. These funds can be accessed penalty-free for eligible reasons, such as education expenses or a down payment on their first home.
By incorporating your children into your business operations, you're not only fostering their growth and financial literacy but also maximizing tax savings and securing their financial future. It's a win-win scenario that benefits both your family and your business.
If you have any questions about the content of this publication, or if you would like more information about HoganTaylor's Tax practice, please email Tony Otto, Tax Practice Lead, at jotto@hogantaylor.com.
INFORMATIONAL PURPOSE ONLY. This content is for informational purposes only. This content does not constitute professional advice and should not be relied upon by you or any third party, including to operate or promote your business, secure financing or capital in any form, obtain any regulatory or governmental approvals, or otherwise be used in connection with procuring services or other benefits from any entity. Before making any decision or taking any action, you should consult with professional advisors.