Children Employed by Parents who own a business

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.

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