Summer! A time for carefree days, barbecues, and…tax benefits?
For many business owners, summer can be a double-edged sword.
The freedom from school and university schedules offers flexibility for families. But finding activities at the right price point that keep young people engaged can be challenging.
While summer jobs used to be the norm, it’s difficult for young people without professional experience to find meaningful employment. Or any employment, really!
Luckily, there’s an option that can benefit both your business and your family: hiring your own children to help with the business.
This article will explore the advantages of involving your kids in the family business this summer.
Tax Advantages of Hiring Your Children During Summer
Hiring your children during the summer can be a smart financial move for your business. Of course, this has to be weighed against your patience and resources to provide training if your kids aren’t experienced in their designated tasks.
But there are many attractive benefits which can make it worth the investment of your time.
Reduce Taxable Income
When you pay your child a fair wage for their work in your business, those wages are considered a deductible business expense and may not be taxable to your child. This means you can lower your overall taxable income, potentially leading to significant tax savings.
But if you’re paying your child $200 an hour for filing, it’s going to raise a red flag.
So, how do we figure out what to pay our child?
- Consider what you’d pay a regular employee as a starting point for the same role.
- Check online for a baseline to see what rates for the specific job you’re hiring for are in your area.
- You must pay a fair and reasonable wage which you would be able to defend if the IRS was ever interested in following up.
Take Advantage of the Standard Deduction
If your child’s total earnings for the year fall under the standard deduction amount set by the IRS each year, they may not owe any income taxes on their earnings at all!
- In 2024, the standard deduction for single filers (which applies to most children) is $14,600.
- This means if you pay your child under $14,600, they likely won’t owe any federal income tax.
- Remember, this is their total earnings. If your child earns income from other jobs, that is included in the standard deduction amount.
Potential Social Security, Medicare, and FUTA Savings
Depending on your business structure and the age of your child, there’s a possibility of saving on payroll taxes like Social Security, Medicare, and FUTA (Federal Unemployment Act) tax.
For example, if you pay children through a sole proprietorship or partnership in which each partner is a parent to the child:
- Payments for children under 18 aren’t subject to Medicare or Social Security taxes.
- Children under age 21 aren’t subjected to FUTA taxes.
Proceed with caution in these areas, and check with tax experts to make sure you’re taking full advantage and falling within the correct legal frameworks.
Beyond Tax Benefits: Building Skills and Family Time
Hiring your children this summer offers advantages that extend beyond savings. Here are some additional benefits to consider:
- Gain Work Experience: Your child can gain valuable experience in transferable skills like responsibility, time management, and teamwork. Plus, job-specific skills and training which may be relevant for their studies or future employment.
- Foster Financial Literacy: Working and earning a wage allows your child to learn about budgeting, saving, and the value of hard work.
- Strengthen Family Bonds: If done with care and intention, working together can create positive memories and build shared appreciation for each family member.
Important Considerations when Hiring Your Children
While some of this may be common sense, it’s important to be extra vigilant when working with minors, even if they are your own kids!
Follow Child Labor and Regular Employment Laws
Child labor laws protect young workers, no matter their employer. These laws regulate the types of work children can perform, the number of hours they can work, and specific safety requirements. It’s important to familiarize yourself with these laws in your state to ensure you’re compliant. Resources like the Department of Labor website can provide more information.
Don’t forget to fill out our relevant forms such as USCIS (U.S. Citizenship and Immigration Services) Form I-9 and IRS Forms W-4 W-2.
Tasks Must Be Age-Appropriate
Assign tasks that are suitable for your child’s age and maturity level. Who knows, maybe your teen will come up with the next winning product or service line!
- Take into account your child’s personality and interests – this increases the chances they will approach the role with care and enthusiasm.
- Consider the level of risk in each role, both for your child and the business.
- For example, it’s probably not a big deal if your child is dealing with a difficult customer if they are working alongside a responsible adult who can take over.
- On the other hand, giving your child full access to social media without specific guidelines and a signoff process could result in some posts that aren’t great for your reputation!
- Younger children might focus on basic customer service, filing, cleaning, food prep, organizing documents, running errands, or data entry.
- Older children could handle more complex tasks like social media management, more complex customer service, cooking, idea generation, or data analysis.
Business Tasks Only!
You can’t have your kids helping with anything that isn’t directly related to your business…no mowing the lawn or cleaning the bathroom (at least not on paid company time!)
However, if they are mowing the lawn or scrubbing toilets at your physical business location, that’s allowed!
Record Keeping Matters
It’s not as simple as occasionally handing your kids some cash whenever you have extra to spare. Your children must be treated as regular employees, which means you must document their payments just like any other employee.
- Have an employment contract with your child outlining hours, rate of pay, and job duties that both parties sign.
- Keep track with a timesheet so you are able to prove their tasks if there is ever questioning from the IRS
- Pay your child by direct deposit or similar, at regular intervals such as twice a month, into a standard bank account.
- You also have the option of paying directly into long-term savings, such as a Section 529 college savings plan or even a Roth IRA…although your child might not be as happy with that arrangement!
Follow The Rules, Reap the Rewards With a Bit of Help
Bringing the kids in to work with you this summer can provide many benefits for everyone involved.
But a little bit of preparation goes a long way. It’s important to ensure you’re doing everything in full compliance with the law.
Talk with our capable team at Momentum Tax & Financial, who can help you relax about the taxes and enjoy a bit of summer family fun.
While we can’t help with awkward dinner table conversations after a tough day at work, we can help make sure you’re covering all of your bases and taking advantage of these significant tax benefits.
