As a business owner, you are constantly looking for potential tax breaks or options for shifting income. If you have children, one option to consider is putting your kids on your payroll. However, choosing to employ your children in your business is not as simple as having them fill out a W4. There are some key factors to consider to ensure that you are following the rules and don’t cost yourself even more.
First, make sure the tasks you are hiring your children to do are age appropriate. For example, if you’ve recently had a baby, your baby is not going to be able to help you with your social media posts. However, they can be an awfully cute addition to your company’s holiday ad promoting your specials. As your children grow, their task list can grow as well. Maybe you need help cleaning your office or you have a computer whiz kid who can help you setup new equipment. Whatever you decide to hire your children to do, you need to ensure that the tasks are reasonable for their age (and maturity… which can vary, regardless of age!).
After you determine the tasks that are appropriate for your children to complete for your business, you need to determine a reasonable compensation for those tasks. Similarly to making sure you set a reasonable salary for yourself as a business owner, your kids’ compensation needs to be set at a level that is appropriate for the tasks they are completing. If you are giving your teens the task of cleaning your office and you would have paid a cleaning service $200 per clean, then you should plan to pay your kids a similar amount. It would not be reasonable to pay them $600 if the going rate is $200.
The way you pay your children will be dependent on your business structure. You may be able to avoid withholding and paying FICA taxes if your business is structured as a disregarded entity or partnership. If your children qualify as a contractor, it could also make sense to pay them in this way. Consult with your CPA to determine the best way to structure your kids’ pay for maximum benefit.
If you limit the total compensation paid to your children to the current standard deduction, you may be able to move some of your taxable income to them and avoid the income tax on that amount. You’ll need to consider any other factors, such as investment income your kids may have, that could affect the taxability of their income or the way their return should be filed. But, if you determine adding your kids to payroll works for your situation, this is a great option for a business deduction while keeping the income in the family.
Written by: Shauna Huntington