Not only does hiring your children provide them with valuable work experience, but it also offers potential tax benefits for your business. However, there are specific rules and regulations that must be followed to ensure compliance with labor laws and tax regulations.
Key Takeaways
- If your child is under 20 years old, you may be subject to the youth minimum wage rate, which can vary based on your location and the type of work performed
- Under federal child labor laws, the minimum age for employment varies based on the type of work and the industry. For non-agricultural jobs, the minimum age is typically 14 for some jobs and 16 or 18 for others
- You cannot just pay your child for doing nothing. They must actually perform real labor at a fair-market wage
- Keep detailed records of the hours your child works, the tasks they perform, and the compensation they receive
- Any attempt to disguise non-deductible personal expenses as business expenses or to pay your child an unreasonable salary could be considered tax evasion and lead to severe penalties
- If your child is earning income from your business, you can contribute to a tax-advantaged retirement account, such as a Roth IRA, on their behalf
How Much Can I Pay My Kids from My Business?
When it comes to determining how much you can pay your children, it’s essential to ensure that the compensation is reasonable and commensurate with the work they perform. The IRS closely scrutinizes payments made to family members to prevent abusive tax avoidance practices.
Reasonable Compensation
The key factor in determining the appropriate compensation for your children is to ensure that it aligns with the market rate for similar jobs and responsibilities. You should base their pay on the duties they perform, the hours they work, and the skills required for the position.
Age-Based Minimum Wage
Additionally, you must comply with the federal and state minimum wage laws applicable to your business. If your child is under 20 years old, you may be subject to the youth minimum wage rate, which can vary based on your location and the type of work performed.
At What Age Can I Put My Child on Payroll?
The age at which you can legally employ your child in your business depends on several factors, including the type of work, the hours involved, and the applicable labor laws in your state.
Federal Child Labor Laws
Under federal child labor laws, the minimum age for employment varies based on the type of work and the industry. For non-agricultural jobs, the minimum age is typically 14 for some jobs and 16 or 18 for others. However, there are exceptions for certain types of work, such as acting or performing in movies, plays, or television shows.
State Labor Laws
In addition to federal laws, many states have their own child labor laws that may be more restrictive. It’s crucial to familiarize yourself with the specific regulations in your state to ensure compliance.
How to Put Your Child on Payroll
If you decide to hire your child in your business, it’s essential to follow the proper procedures and maintain accurate records to comply with tax and labor laws.
Obtain Necessary Permits and Documentation
Depending on your state and the nature of your business, you may need to obtain work permits or other documentation to legally employ your child. Additionally, you’ll need to collect the necessary personal information and tax forms, such as a W-4 and an I-9 form.
Maintain Accurate Records
Keep detailed records of the hours your child works, the tasks they perform, and the compensation they receive. This documentation will be crucial in the event of an audit or if questions arise about the legitimacy of their employment.
Follow Tax Withholding and Reporting Requirements
As an employer, you’ll be responsible for withholding and paying the appropriate taxes, such as Social Security and Medicare taxes, on your child’s wages. You’ll also need to issue them a W-2 form at the end of the year and report their earnings on your business tax return.
To streamline the process of tracking write-offs and payroll expenses related to hiring your child, consider using an accounting software like Xero. Xero integrates seamlessly with popular payroll platforms like Gusto, allowing you to easily record and manage payroll information, deductions, and associated tax liabilities within the same system.
Try Xero risk-free for 30 days
Can I Save on Taxes by Hiring My Kid?
One of the potential benefits of hiring your child in your business is the opportunity to save on taxes. However, it’s essential to understand the specific tax implications and follow the rules to avoid any issues with the IRS.
Writing-Off Salaries
Since salaries are a business expense, you will be able to write off your child’s salary which saves you some money on taxes!
While hiring your kid can provide tax benefits, it’s essential to follow all applicable laws and regulations. Any attempt to disguise non-deductible personal expenses as business expenses or to pay your child an unreasonable salary could be considered tax evasion and lead to severe penalties.
Other Benefits of Hiring Your Kid
No Federal Income Tax
Each year, there is a yearly standard deduction (in 2023, it was $13,850). If you pay your child under this amount, they are not subject to Federal income taxes.
Note that tax savings change based on the type of legal entity. If you’re a sole proprietorship, your children will need to pay social security and Medicare taxes.
Contribute to Your Child’s Retirement Account
If your child is earning income from your business, you can contribute to a tax-advantaged retirement account, such as a Roth IRA, on their behalf. This can help them start building savings for retirement at an early age.
Final Thoughts
In conclusion, paying your kids from your business can be a mutually beneficial arrangement, providing valuable work experience for your children and potential tax advantages for your business. However, it’s crucial to understand and comply with the relevant labor laws, tax regulations, and recordkeeping requirements to avoid any legal or financial consequences. If you’re unsure about the specifics, it’s always best to consult with a qualified tax professional or legal advisor to ensure you’re following the proper procedures.
