Put Your Kids To Work in Your Business and Save Money!

Hiring your children to help you in your business is a smart tax planning strategy.  The IRS says that children under 18 are not subject to social security, medicare taxes, or FUTA taxes.  The State of AL says they are exempt from SUI until they are 21 and the same applies to FUTA.  They are subject to Federal and State income taxes but a little planning can make sure you don’t exceed certain threshold amounts which would create the need to file a federal or state tax return.  For some it may even be worth the filing for the tax savings.

For 2018 you can pay your child up to $17,500 (standard deduction equal to earned income up to a maximum of $12,000, plus $5,500 deductible IRA contribution) without either of you incurring a tax liability. That’s because reasonable wages you pay to your minor child to work are fully deductible as a legitimate business expense, lowering your gross income.  For your child, the standard deduction and IRA contribution eliminates all of the tax on the child’s income. And since the money was earned, the “kiddie tax” doesn’t apply even if your child is under age 18.  Note the term reasonable wages. This is not a cheat its a legitimate tax saving opportunity and a great learning opportunity for your child.

How much you save in tax by doing this is dependent upon your tax bracket. If you are in the 24% bracket and you maxed it out as shown above you save $4200 in income tax plus another $2677 in net self employment tax. That is is $6877 is tax savings for the parent doing this for one child. Note that your child could have some state liability with this strategy if you reside in a state that has income tax. There are lots of moving parts in this strategy so consult with a CPA to make sure you know all the ramifications.

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