• Adam Kae & Associates

Hiring Your Children In Your Business

Tax Savings, Teaching About Money and Investing, and Bringing Your Family Closer Together


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?


Read on to Discover The Basics to Incur No Income Tax Liability for Your Child:


For Children Working in their Parent’s Unincorporated Business

(I.E. Sole Proprietor/Partnership with Parent-Only Partners)


Wages, Deductions, & IRA Contributions


In 2020, the maximum wages you can pay is $18,400. You can deduct up to $12,400 for a standard deduction and $6,000 for a traditional IRA contribution. If you don't make a traditional IRA contribution OR you make a Roth IRA contribution, then your limit for wage payments is $12,400.


Also, note that a traditional IRA contribution can be made up until the due date of a tax return (April 15th!).


The wages you pay to your children must be reasonable compared to the job they're performing. So, you can't pay them $100/hour for passing our fliers outside. Any "kiddie tax" does not apply, either, because the income is earned income.


While giving them a large "birthday bonus" or year-end bonus may seem like a great idea, it is typically not recommended. The IRS doesn't want a lump sum to be paid to evade taxes (.ie if you paid your child $12,000 in one lump sum and then nothing the rest of the year, it is perceived as a non-tax deductible business expense rather than a payment for work performed and completed.


FICA & FUTA


FICA (Social Security + Medicare tax) and FUTA/SUTA (unemployment tax) do not apply to either the employer (you) or the employee (your child(ren)). This exemption applies up to age 18 for FICA and up to age 21 for FUTA/SUTA.


In addition, this applies to ALL sole-proprietorships, but it only applies in partnerships where the parents are the only partners.


Tax Forms


At the end of the year, you'll issue a W2 for the child, as you do for other employees. In addition, keep payroll records of the work they've done along with their rate of pay.


It's always a good idea to also keep a copy of their W4 for withholding and an I-9 form verifying their employment status.


At the end of each quarter/year, you'll also have to file Forms 941/944 and 940.



Checklist for Children Working in their Parent’s Incorporated Business

(i.e. S-Corp/C-Corp/Partnership with Non-Parent partners)


Wages, Deductions, & IRA Contributions


In 2020, the maximum wages you can pay is $18,400. You can deduct up to $12,400 for a standard deduction and $6,000 for a traditional IRA contribution. If you don't make a traditional IRA contribution OR you make a Roth IRA contribution, then your limit for wage payments is $12,400.


Also, note that a traditional IRA contribution can be made up until the due date of a tax return (April 15th!).


The wages you pay to your children must be reasonable compared to the job they're performing. So, you can't pay them $100/hour for passing our fliers outside. Any "kiddie tax" does not apply, either, because the income is earned income.



While giving them a large "birthday bonus" or year-end bonus may seem like a great idea, it is typically not recommended. The IRS doesn't want a lump sum to be paid to evade taxes (.ie if you paid your child $12,000 in one lump sum and then nothing the rest of the year, it is perceived as a non-tax deductible business expense rather than a payment for work performed and completed.



FICA & FUTA


No FICA nor FUTA/SUTA exemptions apply.


Tax Forms


At the end of the year, you'll issue a W2 for the child, as you do for other employees. In addition, keep payroll records of the work they've done along with their rate of pay.


It's always a good idea to also keep a copy of their W4 for withholding and an I-9 form verifying their employment status.


At the end of each quarter/year, you must file Forms 941/940 to show taxes withheld and paid.



Want to learn more about hiring your child for your business?


Here are some services Adam Kae & Associates can offer to get you started:

  • Process Development

  • Budget Management

  • Financial Forecasting

  • Risk Management

  • Profit Optimization

  • Specialty Area Finance Challenges

  • Financial Analysis


Here's an infographic to share after reading!








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Disclaimer: This article contains information and opinions from Adam Kae & Associates, and the information and opinions should not necessarily be seen as the best possible solutions for your business. Please contact us at info@adamkae.com to help you find the best solutions for your business.


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