The Untold Benefits of Hiring Your Kids in Your Business

Nov 01, 2023

Hiring your kids is one of the top kept tax saving secrets.

Now when we start this conversation with clients a lot of people cringe and think this is something that the IRS surely would not allow. However, that is not the case. This is actually discussed directly in the tax code. However, it must be done correctly in order for it to be legal.

We have actually had some lengthy conversations on this in our Free Facebook Group so thought it would be a great topic to write on!

What Do I Need To Know About Hiring My Kids In My Business?

Get a business deduction and your kids potentially pay no tax on that income.

  • IRS Website
    • “Payments for the services of a child under age 18 who works for his or her parent in a trade or business are not subject to social security and Medicare taxes if the trade or business is a sole proprietorship or a partnership in which each partner is a parent of the child.”
    • Pay your child through a sole prop or partnership, no need to withhold social security, medicare, FUTA, etc if your child is under 18.
  • Benefits
    • You get a business deduction for items you are typically paying personally anyways.
    • You child can claim the standard deduction (up to $13,850) in 2023, so the first $13,850 would be tax fee at the federal level and then any income above that would be taxed starting in the lowest tax bracket.
    • You are likely paying for your child’s basketball camps, entertainment, technology, etc so why not get a business deduction for these items you are going to pay for anyway?

Great, Now How Do I Do It? 

In order for this to be legal and stand up against the IRS, it must be done correctly! You cannot just pay your kids a set amount out of your business without any backup.

  • The Details
    • Must be age 7+ – This is an age that has been proven in tax court.
    • Must pay a reasonable wage for the type of work they are doing in the business.
    • Track time to record the actual work they are doing to support the deduction.
    • Pay to an account in the child’s name.
    • Prepare a W2 at year-end
    • Have required documentation: job description, employment agreement, hour/task tracking, payment proof, W2, etc. In TaxElm we have a full implementation guide with all of these documents. Check that out here!
  • Potential Issues or Planning Opportunities
    • S Corporation
      • If you operate as an S Corp you are not considered a sole prop or partnership so you WOULD need to be withholding social security, medicare, etc from the payments. This would all of course still be considered a business expense, just some additional tax. In TaxElm, we discuss some work arounds for this “problem”.
    • Non Child Family Members
      • Think grandchildren, nieces, nephews, etc. If you wanted to hire family members in this area they would not be your direct children so the social security and medicare avoidance would not be applicable. Here too there are some potential work arounds that we walk through in TaxElm.

As mentioned, this is a tax strategy you do not want to miss out on. What a great opportunity to get a business deduction and have your children potentially pay no taxes on that income.

Now of course you need to make sure you are doing things correctly to cover you in an IRS audit but that is something that can easily be done as we discussed here.

For more details on this along with additional training and tax strategies to ensure you are paying the least amount in taxes as legally possible, check out TaxElm!

 

The Time Is NOW To Start Paying Less In Taxes. Join TaxElm and start eliminating taxes and growing your wealth!

What you'll get:

  • Tax Savings Blueprint and Training: We’ll provide you with a customized tax plan that is tailored to meet your specific needs and goals. Along with that, you have access to our library of training modules, implementation guides, supporting documents, and more.
  • Unlimited Access to Tax Experts: Got a specific question about a tax strategy? You’ll have access to our team of tax experts to get the accounting and tax answers you need.
  • Annual 1-on-1 Live Consultation: Once a year you get a live meeting with a tax expert to discuss anything tax savings you would like. This is your time to get your questions answered live 1-on-1.
  • Annual Bookkeeping Analysis: Annually you will submit your financials to our team of accountants and we will put together a high level business financials overview report custom to your business.
  • Monthly Group Webinar and Training: Every month, we host a live, virtual training session on a key tax topic. Join us live and bring your questions or view the recording on your own schedule.
  • Partner Directory and Discounts: You get exclusive, members-only rates and access to our expert referral network for accounting, bookkeeping, tax preparation, payroll, financial planning, legal, retirement planning, tax resolution, and more!

It is like having a tax strategist walking with you along this entrepreneurial journey!

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