As Autumn is well under way, many small business owners are already planning for the next year’s budgets, taxes, and goals. Family owned businesses may also be planning around their kids.
Are your kids getting to the age where they’re a little old for summer camp, and considering getting a part-time job? You should consider hiring them at your small business.
As a small business owner, you’re always looking for ways to reduce tax burdens while maintaining a productive, family-centered business. Did you know that hiring your child over the summer can help lower your tax liabilities? Not only does this strategy allow your child to gain valuable work experience and allow you to spend more time with them, but it also offers tax-saving opportunities for your business.
Here’s how employing your kid can make a significant impact on your taxes:
1. Take Advantage of Payroll Tax Exemptions
If your child is under the age of 18 and you’re operating as a sole proprietor or a partnership where both spouses are the only partners, you are not required to withhold Social Security and Medicare taxes on their wages. This exemption applies as long as your business is not incorporated, giving you a direct tax-saving advantage by reducing payroll tax liabilities.
2. Deduct Your Child’s Wages as a Business Expense
The wages you pay your child are considered a legitimate business expense, provided that the amount is reasonable for the work they perform. This means you can deduct these wages from your taxable business income, reducing the overall taxable income and thus lowering your tax burden.
3. Lower Your Family’s Taxable Income
When you hire your child, the wages they earn are taxed at their rate, which is likely much lower than your personal or business tax rate. For example, if your child earns less than the standard deduction amount ($13,850 in 2024), they won’t owe any federal income taxes. This allows you to effectively shift some of your income to your child, reducing the family’s overall tax liability.
4. IRA Contributions for Your Child
Once your child earns income from working for your business, they can contribute to a traditional or Roth IRA, helping them build a nest egg early on. This provides a long-term benefit to your child while reducing their taxable income further.
5. Increased Savings on Self-Employment Tax
If your business is structured as a sole proprietorship or partnership (without incorporation), hiring your child helps you save on self-employment tax. Since the wages paid to your child aren’t subject to Social Security, Medicare, or unemployment taxes, your business can experience significant tax savings.
6. Keep Everything Above Board
To maximize these tax benefits, it’s essential to ensure that the job you assign your child is legitimate and that their pay aligns with the work they perform. The IRS requires that your child’s job must be a real role within your business, with duties and compensation comparable to what you would pay someone else for similar work. Keep detailed records of hours worked and tasks completed to avoid issues during a tax audit.
Final Thoughts
Hiring your child for your small business is a smart strategy to reduce tax liabilities while instilling a strong work ethic and responsibility in your child. However, it’s crucial to follow IRS guidelines to ensure compliance and maximize your tax benefits. Consult with a trusted tax professional, like those at Key2 Accounting, to navigate the specific rules and take full advantage of these savings opportunities.
By thinking ahead, you can optimize your business finances and create a meaningful summer job for your child, all while saving on taxes.
