How to Hire Your Kids in Your Business
Hiring your kids in your business is one of the most underused tax planning strategies that result in substantial tax savings. You will receive a business deduction for their gross wages. Working with you in your business can also instill a great work ethic and skills in saving money in your children at an early age. So, the rewards are great, but you must be sure to follow all the correct procedures that the tax code has in store for you. So, let’s go through all of them.
Our objective will be to give your business a full deduction of your child’s gross wages, have your child be exempt from paying social security tax, medicare tax, withholding of federal or state taxes. federal unemployment tax, and state employment tax. Your child will not have to file a tax return and you will still be able to take your child as a dependent on your return. Sounds impossible but in can be done in the right circumstances. First, your business must either be a sole proprietorship, single member LLC, or a partnership with the only other partner being your spouse. Second, your child should be between 7 and not yet 18 years of age. The work you are paying them for must actually be done and it must be related to your business. Perhaps cleaning the office, answering phones, or make copies. The child must be capable of doing the work, so you probably do not want a young child driving a forklift. The amount paid must be reasonable in regards to the type of work. Thus, you cannot pay your child $100 an hour to make copies. The salary must be what you would pay an unrelated worker to do the job. You must keep necessary payroll records and actually pay your child and deposit the funds in your child’s account.
You are going to pay your child $6,300 or less per year to stay under the threshold of filing a return. Do not worry about the so called “Kidde Tax” being taxed on your return because “Kiddie Tax“ is passive income such as interest and dividends and we are talking earned income. And with this earned income your child now has the right to make an IRA contribution for $5,500 a year. You can also elect to deposit your child’s wages in a 529 Education Fund to save for their college education. The earnings from both an IRA and a 529 Plan will grow tax free each year for your child. This can result in a substantial amount of money down the road. All of which your business has received a tax deduction for.
Now let’s talk about the mind-numbing government paperwork requirements you must work through. Do not skip these steps as you will not qualify for the deduction without them. Just like all workers, your child should complete a Form W-4 stating they will file exempt from withholding because no taxes will be due, have a I-9 immigration compliance form on file, file federal Form 941s payroll tax returns showing no payroll taxes due, file federal Form 940 showing no federal unemployment tax is due. If you live in Arizona, you will have to file AZ Form A1-Qrts to show no Arizona withholding are due and UC-108 to show no AZ Unemployment tax is due. So, while you are exempt from the tax, you are not exempt from filing the payroll tax forms.
If your business is a corporation or a partnership with a partner other than your spouse, this plan will still work except your child will not be exempt from any of the payroll taxes we mentioned above.
Tim Walch CPA
H&S Accounting CPAs LLC