Putting Your Child on Payroll: Achieve Substantial Tax Benefits

kids working

By: Whitney Hodge

Published: November 5, 2021

Share on facebook
Share on twitter
Share on linkedin
Share on email

Are you a parent with minor children looking for a way to supplement your income and use their assistance in your business? Are you aware that hiring your children has various tax advantages? 

In today’s tight labor market, it’s often difficult for small businesses to hire the individuals they need. For many small businesses, however, the potential benefits of hiring their own children to fill currently open roles may present a win-win for taxes and labor during a labor shortage.. 

Hiring your minor children to work in your business can result in significant tax savings. If filed correctly, wages paid to your child are fully deductible as a business cost. Let’s take a closer look at the options available to you, your family, and your business.

Tax Advantages to Employing Your Child

Hiring a family member to work for a family business can be beneficial in a variety of ways:

  • As a business owner, the parent can utilize the insurance costs and other benefits paid to a family member as a tax deduction.
  • The child’s income is taxed at a lower rate than the parent’s income. As a result, it contributes to a reduction in the overall tax burden.
  • Wages paid to children diminish the organization’s net income, which minimizes the concentration of self-employment taxes paid by the parent.
  • FICA taxes are not necessary for children under 18 who work for a parent who is a sole proprietor or manages an unincorporated business, since neither the child nor the business shoulders half of the tax liability.

It’s a good idea to make full use of any tax benefits that you qualify for. But, you must ensure that any tax benefits you reap in this case are legitimate and that your children are bonafide personnel. You may encounter problems with the Internal Revenue Service if you attempt to reduce your tax burden without showing proof of hours worked and activities completed. One other major factor to consider is that  you must also keep follow all child labor laws, regardless of familial status.

IRAs

If you recruit your children to work for your small business, you can set up a separate retirement account for each of them. By doing so, it will enable you, as a business owner, to not only save money by paying less in taxes, but also contribute to the savings account. An IRA permits a child to withdraw funds early if necessary, but it also provides the advantage of tax-free withdrawals if the child waits until they are ready to retire before taking funds.

Getting a Head Start on Retirement Savings

Your business may be able to supply retirement benefits to your children depending on the sort of plans you offer and how they determine eligible employees. Your children can contribute to a traditional IRA or a Roth IRA, because they make a profit from their respective job. The only necessity for your children to make annual Roth IRA contributions, aside from the income limitation, is that their income for the year corresponds to what has made a significant contribution for that year.

Do The Process Right

You will need to make sure that you manage payroll properly so that you and your business will not run into any accounting or tax problems in the future. Here are some vital pointers to keep in mind:

  1. Use a formal employment agreement. It’s a good idea to have your child sign a contract outlining job responsibilities and hours. This way, if the IRS or your accountant requires more precise information, they will have easy access to them.
  2. Use checks or automatic deposits. Rather than paying your child in cash, make use of an automated deposit or check. You can even direct deposit your child’s paychecks into a Roth IRA account if you want to assist him or her with future savings.
  3. File taxes properly. Fill out the necessary tax forms, just like you would for any other employee. Doing so will entail submitting a Form W-2 detailing your child’s earnings.
  4. Commit to fair wages. Pay your children reasonable compensation for the task that they are doing. Although it may be tempting to take a significant tax deduction by paying an additional hourly rate, the IRS may raise a red flag if you pay significantly more than average for the position.

Take Full Advantage of This Win-Win Situation

Engaging your children in your business can assist them in learning important financial lessons as well as taking on responsibilities and gaining useful employment skills. Taking advantage of tax benefits allows you to keep more of your money in the family, and start your children on the path to savings directly.. An experienced accountant can help you navigate the finer points of how hiring your children can help your business and reduce your family’s overall tax burden.

Lloyd & Hodge Can Assist You with Your Business Accounting Needs

Lloyd & Hodge know how stressful accounting and taxes are for many nonprofits, small businesses and sole proprietors. We know you’d rather focus on growing your business, and we understand that taxes are something most people would rather not think about. 

With proper planning, you can manage your effective tax rate and reduce your costs. Tax planning and restructuring services from Lloyd and Hodge are designed to protect your business’s financial future while maintaining compliance with all laws and regulations.

We can work with you remotely! We use the latest in technology and security so we can handle your accounts remotely without ever needing to make a trip to our office! Contact us today and find out how you can reduce your tax liability and plan for your business’ and your family’s future.

Share this Article

Share on facebook
Share on twitter
Share on linkedin
Share on email

Continue Reading

Learn the

Six Secrets for Startup Success

We’ve walked this journey with hundreds of startups as advisors, partners, friends, and business owners ourselves. This guide, The Six Secrets for Startup Success, is a collection of lessons learned aimed at helping you begin your journey on the right foot.

Ebook Cover Template
Ebook Cover Template

6 Secrets to Startup Success

Download Our Free Guide!