Ever thought about hiring your kids? Beyond building work ethic, this strategy can bring significant tax benefits to your family if done right. Let’s walk through how you can make it work and the key benefits to keep in mind:

1. Check the Eligibility

• Business Type: If you’re a sole proprietor or have a family partnership or LLC, this approach really shines. S-Corps and C-Corps can still benefit, though payroll taxes work a bit differently.

• Legitimate Job: Make sure the job you’re hiring them for is legitimate. Think of tasks like social media management, organizing files, or helping with marketing. It has to be necessary for the business.

• Reasonable Pay: Pay your kids a fair rate for the work they’re doing. Paying more than market rate could raise eyebrows with the IRS.

2. Set It Up Right

• Define the Job: Outline a job description to clarify duties—this helps validate their role.

• Fair Wages: Pay based on what you'd offer any other employee for similar tasks.

• Payroll Setup: If you’re a sole proprietor or family partnership, skip Social Security and Medicare withholding if they’re under 18. For S-Corps or C-Corps, payroll taxes apply, but the income tax benefits can still be worthwhile.

• Track Everything: Keep records of hours worked and tasks completed—just as you would for any employee.

• Issue a W-2: If their income exceeds the standard deduction ($13,850 for 2024), they’ll need a W-2 and might need to file a tax return.

3. Why It Pays Off

• Income Shifting: Pay your kids, and you’re essentially moving income from your higher tax bracket to their lower one. It’s a smart play if you’re in a high tax bracket.

• Payroll Tax Savings: For sole proprietors with kids under 18, forget about Social Security, Medicare, and FUTA taxes.

• Standard Deduction: They can earn up to the standard deduction amount tax-free, which means that’s effectively deductible from your income.

• Retirement Savings: With earned income, your child can contribute to a Roth IRA—growing tax-free for the future.

• Business Deduction: Wages paid to your kids count as a business expense, lowering your taxable income.

• Education Savings: Their earnings could be saved for education, even funneled into a 529 plan for additional tax benefits.

4. A Few Things to Keep in Mind

• Age-Appropriate Work: There’s no minimum age, but the job has to fit their abilities. Younger kids can help with simpler tasks, while older ones can handle more complex roles.

• Compliance Matters: Treat them like any other employee. The IRS expects it, and so should you.

• Labor Laws: Federal and state child labor laws apply. Check for rules on hours they can work, especially during the school year.

Example in Action

Let’s say you own a small business, and your child helps with filing or data entry. You pay them $12,000 for the year, which reduces your taxable income. Thanks to the standard deduction, your child won’t owe federal taxes on it, and if you’re a sole proprietor, you won’t need to pay payroll taxes either. Simple, smart, and effective!

Hiring your kids can be a win-win strategy, saving you money while teaching them about work and finances. Just keep things above board, and you’re in for both tax savings and some priceless life lessons.

If you’re ready to explore how strategies like this can help you flourish—both personally and financially—we’re here to help. Book a call with us, and let’s see how we can put these insights to work for you. We’re focused on one thing: helping you live a better, more prosperous life.

We’re with you—we’re here to help.