Hiring your children to work in your business can be a win-win situation for everyone. Your kids will earn money, gain valuable experience in the workplace, and learn what you do every day. And, you’ll reap a few tax benefits in the process.
Before you decide if hiring your child is right for your business, make sure it’ll work for you.
Generally, if your child is doing a legitimate job and the pay is reasonable for the work, his or her salary can be a tax-deductible business expense.
Your child’s income can be tax-free to them up to the standard deduction amount for a single taxpayer ($12,200 in 2019). Wages earned in excess of this amount are typically taxed at your child’s rate, which is likely lower than your rate.
The following guidelines will help you determine if the arrangement will work for you.
1. Make sure your child works a real job that (s)he can reasonably handle, no matter how basic or simple. Consider tasks like office filing, packing orders, deliveries, customer service, stocking shelves, or waiting tables.
2. Treat your child like any other employee. Expect regular hours and appropriate behavior. If you’re lenient with your child, you risk upsetting regular employees.
3. To avoid questions from the IRS, make sure the pay is reasonable for the duties performed. It’s not a bad idea to prepare a written job description for your files. Include a W-2 at year-end.
4. Record hours worked as you would for any employee. Pay your child using the normal payroll system and procedures your other employees use.
5. Hiring your children works best if you’re a sole proprietor. It has additional tax benefits not available if your business is organized as a C or S corporation.
Have questions about hiring your child? Let’s talk!
