Tax Benefits of Hiring Your Kids

By
Real Estate Services with Julie L. Bohn, CPA

As a follow-up to my previous post, I want to give some details on how you can save big money by hiring your kids to help you in your business.

If you are an agent filing as a sole proprietor, in a partnership with your spouse as the only other partner, or a single-member LLC filing Schedule C, any wages you pay your children to help in your business are:

  • Not subject to Social Security and Medicare taxes until age 18
  • Not subject to Federal Unemployment tax until age 21
  • Possibly not subject to State Unemployment Tax or Workers' Compensation, depending on the state you live in
  • Subject to income tax withholding, but first $5,450 of wages earned in 2008 by each child are nontaxable, assuming that the child has no other income
  • Wages above $5,450 will incur federal income tax, but it will still likely be at a much lower tax rate than you would be
  • Possibly taxable in your state and/or locality, so be sure to check this out

Even though the child's wages under $5,450 aren't taxable due to the standard deduction, you will still be required to report their wages either quarterly on Form 941 or yearly on Form 944.  You will also have to prepare and file W-2's at year end as well.

One of the most beneficial aspects of hiring your children is that you can use whatever wages they make to pay for items that are not deemed to be necessities by the IRS and still be able to deduct your children as your dependents.  For example, if your child wants to go on a school trip that costs $3,000, you can deposit their checks into an account for them and use it for this purpose.  So, what would have been a nondeductible personal expense for you indirectly becomes a deductible business expense for the work that child performed.

A few things you should keep in mind, though.  You should definitely keep good records to show what duties the child performed and preferably pay them by check.  Another important tip is to pay your child a "reasonable wage" for the work they do.  This is as simple as determining what you would have to pay for an adult to do the same job and possibly reduce it a bit, depending on the child's age.  And believe it or not, the IRS has upheld paying child wages for kids as young as 7 years old! 

On the personal side of all this, I definitely take advantage of these benefits with all three of my teenagers.  My son (the only one with a license yet, bummer!) drops off and picks up files and delivers tax returns to my clients, goes to the bank and post office, buys office supplies, and is generally my courier, especially during the summer months.  And both of my daughters have become quite good at entering invoices into Peachtree for some of my clients who need bookkeeping services done at times.  And of course, there is always that dreaded filing that needs to be done.

If you stop to think about it, I am sure that you can find plenty of things for your kids to help you with. 

You'll be teaching them responsibility and saving money at the same time!  Now what could be better than that?

Julie L. Bohn - Helping Agents Reduce Their Taxes

 

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Comments 26 New Comment

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Rainer
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Julie Bohn
Helping Agents Reduce Their Taxes
Julie L. Bohn, CPA

Sheree:  I am not an attorney, but my understanding is that child labor laws do not apply for children that work for their parents.  I have never heard of this being a problem, but if you are concerned, it might be best to check with your state to see if it has any special rules.

September 24, 2008 11:51 PM
Anonymous #23
Anonymous
Anonymous

Great idea but the only "kids" I have left are my 2 Cavaliers so I guess that's not an option for me. 

September 25, 2008 06:33 AM
Rainmaker
1,238,489
Charles Stallions
800-309-3414 - Pensacola, Pace or Gulf Breeze, Fl.
Charles Stallions Real Estate Services

This is good stuff and not really news. Just one of those things we never follow or least me. I have always heard and wanted to to this and never have. It looks like this would be one of the first things a tax accountant would set up.

September 25, 2008 07:13 AM
Rainer
288,801
Steve Kappre
NMLS# 217008 Mortgage Loan Officer NJ 856-419-3561
Treasury Mortgage | Mortgage Company - New Jersey

If anyone is interested in more info on this, I have learned a great deal from Sandy Botkin's books and taxes.  He goes into great detail on topics such as this and other real estate related topics. 

September 25, 2008 09:07 AM
Rainer
30,019
Kristin Hunteman
CDPE, SFR, CSSA, ABR
Coldwell Banker Gundaker

Awesome post! I have a 13 year old wanting to go on a school trip to Washington DC in the spring.  I was already planning on hiring her to do some work for me.  I'll definitely set up an account for her and deposit her pay into that!

September 25, 2008 12:38 PM
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Julie Bohn

Helping Agents Reduce Their Taxes
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