One of the advantages of operating your own business is hiring family members. If you are self-employed, hiring your children to work for you can provide spending money for them and tax savings for you. But make sure you follow the guidelines.
Pay Reasonable Wages
You can deduct “reasonable wages” paid to your children for legitimate work performed for your business. As long as your children are under age 18 and your business is unincorporated, you generally won’t have to pay Social Security or Medicare taxes on their pay.
Keep Good Records
Ask your child to fill out a time sheet or punch a time clock, and pay with a check rather than cash. Keep in mind that wages that are inconsistent with the job or the age of the child won’t pass muster with the IRS.
Report Their Earnings
Complete and file a Form W-2 at the end of the year showing how much you paid your child. Income that exceeds the standard deduction will be taxable.
How much can you save?
Here is an example of how much you can save. Suppose you’re in the 33 percent tax bracket and you pay your 17-year-old son to help with office work full-time during the summer and part-time into the fall. He earns $11,800 during the year (and doesn’t have earning from other sources). If that $11,800 otherwise would be paid to the business person, he or she saves $3,894 (33 percent of the $11,800) in income at no tax cost to the son.
CONSULT WITH A CPA
Everyone’s financial situation is different. A CPA can help you identify the right course of action for your business and your family.
For more help with individual or business taxes, connect with us today. Our team can help you with all your tax issues, large and small.