Tax Advantages of Hiring Your Children
By Evlyn Carlile & Shelly Cedarblade
Hiring your children as employees can be beneficial for both your children and your business. If you are a sole proprietor, there are tax advantages for your business and your children will gain valuable work experience working for you.
- If you are a sole proprietor, you do not need to pay Social Security or Medicare taxes until your child turns 18.
- Also, as a sole proprietor, you are not required to pay federal unemployment taxes until your child turns 21.
- Since you will be withholding income taxes, you will be required to give them a W2 at year end. Ask your tax preparer for filing requirements for the upcoming year.
Benefits to Your Child
Children who work for their parents can learn valuable skills and gain job experience for the future.
They can learn about earning money and saving for the future. Once a child earns wages, they can establish an IRA and begin saving for their future. Consider opening up a Roth IRA if your child may use the funds early for either college or purchasing their first home.
The child employee can get an insight into what you do and may even develop a love for the family business.
When self employed taxpayers hire their own children the wages must be reasonable for the work performed and records must be maintained to support the payment and reasonableness of the payment.
Treat Them like Employees
Hiring your children can be a challenge. Keep in mind that you are their employer when they are working for you. Here are some tips to ensure a smooth transition:
- Discuss what the job entails and pay them based on industry standards. Write up the employment terms you’ve both agreed to and sign them.
- Have them fill out time cards showing hours worked and jobs performed.
- Pay them regularly by business check (weekly, biweekly or monthly) and have them put that money in a savings account in their name.