If your business is beginning to grow and you need a little extra help to keep up with demand, hiring your kids to work for you – even if only for the summer – could make for an efficient and simple tax-saving strategy. Not only that, but you can help to instil some strong work ethics in your children, and even start a savings plan for their future.
How hiring your kids can help you avoid payroll taxes
If you’re a single member LLC or Sole Proprietorship, and you hire your children who are under the age of 18, while you may not know it, you’re not required to withhold any payroll taxes. As a business owner, you’ll likely be familiar with the Federal Unemployment Tax Act (FUTA), State Unemployment Tax Act (SUTA), and Federal Insurance Contributions Act (FICA) taxes, which requires you to withhold and match for your employees. Hire your kids, and this simply doesn’t apply.
Hire your child, and keep the first $12,200 of tax-free income in the family
Something that makes hiring your kids an even more appealing prospect, is thatyou get to keep the first $12,200 of income that someone who isn’t a relative would normally take home with them.
Adults and children don’t have to pay federal income taxes on the first $12,200 of income this year because of the Standard Deduction, and if you pay someone who isn’t a relative to work for you, and they take that $12,200 of tax-free income home with them. Hire your child, and you can keep it in the family.
Kickstart a retirement and college savings account
Once your kids have started working for you and earn an income, they’re able to contribute to a Roth or Standard IRA, which can be pulled out at a later date to help towards the cost of college, penalty and tax-free. This provides a fantastic opportunity to kickstart their retirement or college savings plan with tax-free dollars or income at their tax bracket.
Note that your kids must actually work!
To get the above mentioned benefits when hiring your children to work for you, it’s important to note that they must actually work for you, and not simply be hired to carry out chores. Should you be audited by the IRS, you’ll have to show them legitimate records of their hours worked and be able to demonstrate that their wages were fair.
To know more about some of the tax saving strategies involved with hiring your kids, reach out to a professional tax advisor or accountant for guidance.