If you are a business owner, it might be positive to employ your kids or other family members in the business. Especially, if you are already supporting these individuals at your higher tax rate, it might be quite beneficial to have an expense for the business and save on the taxes paid a lower rate (or no taxation).
Some of the most notable benefits are:
- Tax-Free Earnings for Kids: Children can earn up to the annual standard deduction ($13,850 for 2024) without paying federal income taxes if it’s their only income. This allows them to receive tax-free income for their work.
- Payroll Tax Exemption: If your business is a sole proprietorship or a partnership (LLC or 1065) with only you and your spouse as partners, wages paid to your children under 18 are exempt from Social Security and Medicare taxes.
- Deductible Business Expense: The wages you pay your children are a legitimate business expense, reducing your taxable business income.
- Savings for the Future: Your child’s earnings can be contributed to tax-advantaged accounts like a Roth IRA, setting them up for long-term financial growth. We highly recommend using the Roth IRA if the earned income is non taxable or taxed at a low rate.
- Teaching values to those children about the value of money, responsibility, team work, and improves the future career progression.
BIG Disclaimer – this individual has to be a bona fide employee – has to do something for the business, clean up the office, organize documents, manage social media, release marketing materials, etc. Also, you need to keep records and documentation to prove the actual work of those employees.
If you have questions about this strategy and need to analyze if might be advantageous in your specific case, reach out to our team of tax professionals for a consultation.
