Reduce your tax liability by hiring your children to work in your business.
Commonly referred to as hiring children tax strategy, hiring your children and tax deduction for hiring your children.
Do I Qualify for the Hiring Children?
If you’re a parent who owns your own business, you have an opportunity to begin the wealth-transfer process and leverage a tax deduction for hiring your children as employees.
2022 Hiring Children Details
If you’re a parent who owns your own business, you have an opportunity to begin the wealth-transfer process and leverage a tax deduction for hiring your children as employees. If your business is a sole proprietorship or a spousal partnership, the hiring children tax strategy offers a few benefits to take advantage of:
• Payments to your children who are under 18 are not subject to social security and Medicare taxes.
• Payments to your children who are under 21 are not subject to Federal Unemployment Tax Act (FUTA) taxes.
• All payments are subject to income tax withholding, regardless of the child’s age or the type of business entity. State tax and withholding rules may apply.
Children older than 8 are considered able to work in the business and therefore take the standard deduction amount for their efforts. Children 7 years and younger are not considered able to work.
Note: Wages paid to your children will be subject to social security, Medicare and FUTA taxes if your business is organized as a corporation (either subchapter S or C) or a partnership that includes individuals in addition to the two spouses.
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• Reduce taxable income.
• A child can be paid more than the standard deduction if those funds were put in a retirement account on behalf of the child.
• Reduce self-employment tax.
• When the amount paid annually to the child matches the standard deduction available to the child, the child can end up with no taxable income.
• Running payroll for each child's labor is required.
• There are documentation requirements to substantiate the deductions.
• You’ll need to establish additional bank accounts for your children.
• Your state's requirements for hiring your child may be more restrictive than Federal labor laws.
Assumptions When Taking the Hiring Children
• Children are able to safely perform the job tasks required of them.
• Children are paid a reasonable wage for their efforts and abilities.
• Children are 8 years of age or older.
• Payroll is generated for each child's labor costs.
• Family Office Management Company
Requirements to Claim the Hiring Children
• Wages must be based on a market rate of pay and be paid in exchange for legitimate services rendered to the business.
• W2 forms must be filed for each child that is hired.
• The employment of children under the age of 18 in any hazardous occupation is prohibited.
Business Entities That Can Claim the Hiring Children
• Schedule C
• Schedule F
• S Corporation
• C Corporation
The material discussed on this page is meant for general illustration and/or informational purposes only and is not to be construed as investment, tax, or legal advice. You must exercise your own independent professional judgment, recognizing that advice should not be based on unreasonable factual or legal assumptions or unreasonably rely upon representations of the client or others. Further, any advice you provide in connection with tax return preparation must comply in full with the requirements of IRS Circular 230.