“You need to have skin in the game,” my parents would tell me when I asked for money and I hadn’t done anything extra special to earn it. What work ethic do you remember your parent(s) teaching you? If you don’t have a vested interest in getting something you really want it will have no value to you.
My son wanted a pair of “special basketball sneakers” for his birthday. I would not buy them for him as a birthday because he had already received another birthday gift from us. “These special basketball sneakers were going to help me play a better game as well as jump higher,” he told me. As parents, we did not just say “no” to the shoes but suggested pooling together all the gift cards and allowance money to see what the total would be. We suggested, “if you want to give me your gift cards, I can buy the shoes on my credit card and you can pay back with your birthday gift cards”. This was a WIN-WIN for us! He bought these special basketball sneakers and learned the life lesson of having skin in the game. Let me tell you, these shoes were treated with such care and love. He would only wear them on an indoor basketball court that was of a certain caliber to ensure the shoe’s tread would not get worn down and he would have a better game. He learned the value of buying something nice for himself, how to work hard for them as well as appreciating the sneakers that he bought.
How can you help teach your child a similar lesson but be able to write it off as an expense for your business? Paying your children is one of the greatest advantages of having your own business. By hiring your kids, you help them establish a good work ethic, teach them the fundamentals of money management, and how you always have to pay Uncle Sam (taxes). Furthermore, you might spark an interest in your child’s mind in the family business, where they will hopefully be able to be your successor one day (link to family business blog). In return, you get employees who have a built-in sense of commitment, teamwork, loyalty, and you may even end up with a long-term succession plan. This sense of dedication is why so many business owners like to claim that their team is “just like family.”
On top of those benefits, hiring your kids also comes with some significant tax-saving benefits as well. Under the Tax Cuts and Jobs Act (TCJA), those tax benefits are now even greater than ever before. That said, if you do hire your kids, make sure they do legitimate work and you pay them reasonable wages, or you may attract unwanted attention from the IRS. More on this below.
THEIR FIRST $13,850 WORTH OF EARNINGS ARE TAX-FREE
The TCJA greatly increased the standard deduction, which is now $13,850 in 2023. This means your children will pay zero federal income tax on anything they earn up to $13,850. This tax break alone can save you thousands each year and applies to both minors and adults. And even if your kids do earn more than $13,850 for the year, they will pay taxes at the reduced rates established by the TCJA, so they’ll still be reducing your family’s tax bill. Plus, as with other employees, you can deduct your child’s salary as a business expense, reducing your taxable income even further.
Even if your child earns less than $ 13,850 for the year, you should still have them file a tax return, especially if they are over the age of 18. Teaching them to file a tax return not only gives them experience managing their finances, but also allows them to start establishing a credit history. And depending on your business structure you may be able to save serious money on your child’s payroll taxes, too.
PAYROLL TAX EXEMPTION
If your business is a sole proprietorship, a husband-wife partnership, a single-member LLC taxed as a sole proprietorship, or an LLC taxed as a husband-wife partnership, you might not be required to withhold or pay any Social Security and Medicare tax (FICA) or federal unemployment tax (FUTA) on your kid’s wages.
This payroll tax exemption applies to parents who employ their children for either part-time or full-time work. The FICA exemption covers parents who employ kids under age 18, while the FUTA exemption lasts until they reach 21.
This exemption can be used to shift some of the income from your own tax rate to your child’s rate, which is most likely significantly lower than yours.
Work-Arounds For Corporations
If your business is set up as an S or C corporation, you don’t qualify for the payroll tax exemption, which means you can still pay your child through your corporation, but you’ll have to withhold taxes from their pay, and they’ll have to file a tax return to get a refund. However, there are ways to get around this restriction by using some creative—yet 100% legal—tax strategies.
For example, instead of paying your kids directly from your corporation, you can create a family management company and pay them from that business. By setting up this new company as a sole proprietorship separate from your primary business and paying your children from it, you won’t have to withhold payroll taxes. Friendly warning – this might not be something you decide to DIY.
There is always more than one way to save on your taxes. Let us help you figure out the best way to pay your kids and still save on your taxes. Call to schedule a call at (954) 237- 4011 or email us at hello@yolofskylaw.com
Don’t Play Chess with the IRS
There is always someone who “knows a trick” to get save themselves a few bucks. In the short term, this might seem like a good idea but we all know that death and taxes are two things that are inevitable in life (Thanks, Benjamin Franklin).
With such hefty savings on the table, it’s inevitable that some people will try to abuse these provisions by claiming the tax savings without having their kids do any actual work, or by vastly inflating their wages. To prevent this, the IRS requires your children to meet a few criteria in order to qualify for these tax benefits:
- They must perform legitimate work appropriate to their age and skill set.
- Their work must exceed the normal household chores they already do.
- They must be paid the going rate for their services and not be over-compensated.
- Good records must be kept, including filing W-2s.
- Their services, work conditions, and hours must be in compliance with federal and state child-labor laws.
There are numerous different jobs your kids can handle for you, which can not only give them valuable work experience, but also provide your business with much-needed support. If you are going to pay your kids, at least make them earn it. Here are a few jobs your kids can take over for your business.
- Serve as models in your advertising
- Answer incoming calls
- Cleaning your office
- Washing company cars
- Updating customer lists
- Stuffing mailers and making trips to the post office
- Updating your company’s social media posts
If you employ your kids (or want to do so), meet with us, to ensure you’re doing everything by the book, and your business isn’t in danger of attracting unwanted attention from the IRS.
MAXIMIZE YOUR COMPANY’S TAX SAVINGS
With such significant tax savings available, there’s never been a better time to put your kids to work in the family business. However, hiring your children is just one way you can reduce your yearly tax bill—there are numerous other tax-saving opportunities you might not be aware of. Schedule your intro call today at (954) 237-4011 or email us at hello@yolofskylaw.com