Are There Tax Benefits to Hiring your Minor Children to Work for Your Business?


As a small business owner, how would you like to save on your federal and state taxes as well as help teach your child(ren) about saving for the future (i.e. college, retirement, car, etc.)? In Virginia, and most other states, if you own your business you can hire your children to work for you regardless of their age (yes, even younger than the standard age requirements in child labor laws). This can help you reduce your business' tax liability while allowing your child to earn income and see the benefits of becoming an entrepreneur. Wouldn't you rather convert their "allowance" into wages that your business can deduct on your taxes?

Here Are The Basics to Incur No Income Tax Liability for the Child

Children Working in their Parent’s Unincorporated Business (I.E. Sole Proprietor/Partnership with parent-only partners)

  • Maximum wages paid in 2019 is $18,100 ($12,200 standard deduction and $6,000 traditional IRA contribution)

  • If traditional IRA contribution is not made then limit the wage payments to $12,200

  • If traditional IRA contribution is made it can be made up until the due date of the tax return (generally April 15th)

  • Wages must be reasonable for the job/jobs performed (i.e. can’t pay them $100/hour for passing out flyers)

  • FICA (Social Security and Medicare taxes) as well as FUTA/SUTA (Unemployment taxes) do not apply to either the employee or employer

  • This exemption applies up to age 21 for FUTA/SUTA and age 18 for FICA

  • These apply to all sole-proprietorships but only partnerships where the parents are the only partners

  • “Kiddie tax” does not apply because the income is earned income

  • Must issue a W2 at the end of the year to the child just as you would to any other employee

  • Must keep payroll records showing work done, hours worked and rate of pay

  • Also should have a W4 for withholding and an I-9 form showing that you verified their employment status

  • Must file forms 941/944 and 940 each quarter/year showing taxes withheld and paid

  • Generally shouldn’t pay large “bonuses” on birthdays or at year-end

Children Working in their Parent's Incorporated Business (i.e. S-Corp/C-Corp/Partnership with non-parent partners)

  • Maximum wages paid in 2019 is $18,200 ($12,200 standard deduction and $6,000 traditional IRA contribution)

  • If traditional IRA contribution is not made then limit the wage payments to $12,200

  • If traditional IRA contribution is made it can be made up until the due date of the tax return (generally April 15th)

  • Wages must be reasonable for the job/jobs performed (i.e. can’t pay them $100/hour for passing out flyers)

  • FICA as well as FUTA/SUTA exemptions do not apply

  • “Kiddie tax” does not apply because the income is earned income

  • Must issue a W2 at the end of the year to the child just as you would to any other employee

  • Must keep payroll records showing work done, hours worked and rate of pay

  • Also should have a W4 for withholding and an I-9 form showing that you verified their employment status

  • Must file forms 941/944 and 940 each quarter/year showing taxes withheld and paid

  • Generally shouldn’t pay large “bonuses” on birthdays or at year-end

If you would like to learn more about hiring your child in your business or to get the process started please don't hesitate to reply. If you would like to model how much you could save from hiring one or more of your children please let us know and we can run the numbers for you.

Questions?

Follow Us:

@PracticalAccountingSolutions on Instagram

@PASFredericksbrg on Twitter

@PracticalAccountingSolutions on Facebook

Practical Accounting Solutions on LinkedIn

If you have questions about this blog post or have suggestions for a future post, contact us today!

Disclaimer: The views presented in this post are meant as educational resources and should not be taken as direct advice for your personal finances or small business. Should you have questions regarding a post relating to your specific finances, please contact us at info@practicalaccountingva.com.

#taxes #businessownership #taxdeductions #employingchildren #smallbusinessowners #smallbusinessadvice #canIemploymychild #canIhiremychildasanemployee #employee #practicalaccountingsolutions #virginiaaccountant

Our primary mission is to maximize benefits to our clients by providing quality, personalized and attentive accounting services. As your trusted advisor, we’re dedicated to doing everything we can to improve your business practices and operations so you can relax and focus on what you do best: growing your business.

Office: 10705 Courthouse Rd, Suite 116, Fredericksburg, VA 22407

©2019 copyright Practical Accounting Solutions

  • LinkedIn - White Circle
  • Facebook - White Circle
  • Instagram - White Circle
  • Twitter - White Circle
  • Yelp - White Circle
  • Google Places - White Circle