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Children Employed by Parents who own a business

by | 52 tax Tips and Weekly Financial Blog for 2023



While rolling out a roadmap for their future professional growth, employing children in your own business also
works to your advantage from the tax perspective. As a self-employed business owner (sole proprietorship),
paying wages to a child can be an effective way to shift income from the taxpayer who owns the business to the
child, who usually is in a lower income bracket.

Jamie, proprietor of a small bed and breakfast, and a mother, employed her daughter, Devin, in her business.
This way she could not only help her daughter understand her finances well and make her literally work for it,
but this move also helped both mother and daughter in saving taxes.

It may even be possible to escape taxes completely on wages paid to the child. The child can contribute to a
retirement plan and may be able to take a tax credit for education expenses. Make sure the employed child
serves a genuine purpose working for the parent.

The child could perform an administrative or small function in the parent’s business. This way the wages paid
would be a legitimate expense of the business. You need to make sure that you do not violate any child labor or
minimum wage laws. Always be sure to keep track of your children’s time while working for you. The presence
of a completed timecard or time record is the BEST way to help prove when and how long your child worked
for you or your company.

When the employer is in a sole proprietorship and the child is under the age of 18, there is no social security tax
to be withheld. Each year the amount the child can earn without paying ANY taxes varies. And any wages paid
by the parent-owner of a sole proprietorship to the child, is a business expense for the owner. Be sure to see
your tax professional, if you own your own business and have children, to discuss the benefits of paying wages
to your children.

Paying children allows the business to pay fringe benefits for the child through the business as well. Benefits
covered could be health insurance, college education, retirement contributions, business trips and more. Your
tax professional knows these rules, limitations and the many benefits there are to hire your children.

Here are some of the benefits of parents employing children:

● No FICA Tax on child’s wages up to 18 years old (Saves thousands of dollars annually for parents who
pay children)

● No Federal Income Tax on child’s wages up to the standard deduction (Again, this can save both
parents and children from paying hundreds or thousands in taxes, per child, each year)

● Ability to contribute to child’s retirement (Children who get paid can contribute into an IRA each year)

● Ability to claim travel and employee benefit expenses for the child from the business

● Ability to pay for health expenses and insurance through the company

● Stay within all child labor and minimum wage laws (Check with Azmoneyguy or your tax professional
for the rules)

● Always keep a completed timecard or record of when and how long the child worked for you or your
company, and a description of their duties performed.

Call today, don’t delay! See how this affects you. We can be reached at 602-264-9331 and on all social media under azmoneyguy.

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Mr. Hockensmith has been a guest newscaster for national and local TV stations in Phoenix since 1995, broadcasting financial and tax topics to the general pubic. He has written tax and accounting articles for both national and local newspapers and professional journals. He has been a public speaker nationally and locally on tax, accounting, financial planning and economics since 1992. He was a Disaster Reservist at the Federal Emergency Management Agency, for many years after his military service. He served as a Colonel with the US Army, retiring from military service after 36 years in 2008. Early in his accounting career, he was a Accountant and Consultant with Arthur Andersen CPA’s and Ernst & Young CPA’s.

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