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Hiring Your Children: A Smart Tax Strategy for Business Owners

Hiring your children in your family business isn’t just a personal decision—it’s a strategic financial move. Here’s what you need to know about integrating your children into your business in 2024, from tax benefits to compliance requirements.

Tax Benefits of Hiring Your Children

Reducing Your Taxable Income

By employing your children, their wages are deductible from your business income, potentially lowering your taxable income significantly, which is crucial if you’re in a higher tax bracket.

Shifting Income to a Lower Tax Bracket

The standard deduction for a single taxpayer in 2024 is $13,850, allowing your child to earn this amount tax-free, effectively reducing the family’s overall tax burden.

Avoiding Payroll Taxes

Children employed by their parents’ businesses under 18 are exempt from Social Security and Medicare taxes, enhancing their savings.

Financial and Educational Benefits for Your Children

Building Work Experience

Employing your children gives them early work experience and teaches responsibility and professionalism.

Contributing to Savings

Their earnings can contribute towards their education or be invested in a Roth IRA, which grows tax-free, setting a foundation for their financial independence.

Compliance and Considerations of Hiring Your Children

Legitimate Employment

Ensure their employment is genuine—wages must be reasonable, and their work should be necessary for the business.

Labor Laws

Be mindful of labor laws related to minor employment, particularly the hours and types of work permitted for children under specific ages.

Payroll Records

Maintain meticulous payroll records, including timesheets, to substantiate the employment should the IRS inquire.

Practical Steps to Implement This Strategy

Determine Appropriate Jobs

Identify roles suitable for your children that provide genuine value to the business, such as managing social media accounts or assisting with filing.

Set Up Payroll

Incorporate your child’s wages into your payroll system to ensure all tax implications are handled correctly.

Consult a Tax Professional

Seek advice from a tax professional to ensure all practices comply with current tax laws and to optimize tax benefits. You can schedule a session with one of our tax experts here.

Business Deduction FAQs for Employing Children

Navigating the specifics of employing your children requires understanding the benefits and the legal requirements. Here are some frequently asked questions:

Children should be capable of performing legitimate tasks suitable for their age and skills.

Yes, necessary tools and uniforms supplied for their work are also deductible business expenses.

Yes, children gain valuable work experience and learn about business operations, which benefits their future career prospects.

It reduces your taxable income and saves on payroll taxes, among other benefits.

Student status doesn’t affect employment eligibility but may provide additional tax benefits like education credits.

Hiring your children can free up more of your income, allowing you to contribute more to your retirement savings. Additionally, wages paid to your children can be deducted as a business expense, reducing your taxable income and potentially increasing your retirement fund contributions.

Yes, your children can contribute their earnings to an IRA or Roth IRA, setting them up for a financially secure future. This strategy can also help instill good savings habits early on.

Paying wages to your children subject to payroll taxes contributes to their Social Security earnings record, potentially qualifying them for future benefits. Meanwhile, reducing your business income through wages paid to children can affect your self-employment taxes.

Involving your children in your business can be part of a succession plan, ensuring the company continues smoothly into retirement. This can provide a steady income stream in retirement if the business remains profitable under your children’s management.

Setting up a family business retirement plan, such as a SEP IRA or SIMPLE IRA, can provide retirement benefits for both you and your children. Contributions to these plans are tax-deductible, and they help secure both your and your children’s financial futures.

Hiring your children can significantly impact your business’s financial health and personal and professional development. This strategy can substantially benefit your family and business with careful planning and compliance.

Want to Maximize Tax Savings by Hiring Your Children?

Schedule a consultation with our experts to learn effective strategies for hiring your children and optimizing your tax deductions.

Secure Plus Financial

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