Tax Benefits of Hiring Your Kids

By
Services for Real Estate Pros 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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Show All Comments
Rainer
72,490
JoAnn Young
Young & Young Properties & Peoples First Financial Services - Melbourne, FL
Florida Real Estate & Mortgages

Julie - Great post and we've subscribed to your blog for more info in the future.  Throughout the last 20 years all four of our kids have stuffed and sealed envelopes.  Never hurts to teach them work ethics and the value of a dollar either. - Steve & JoAnn Srein

September 24, 2008 01:26 PM #7
Rainmaker
362,833
Dean Moss
Dean's Team - Keller Williams Realty Partners Chicago IL - Chicago, IL
Dean's Team Chicago IL Real Estate Team

Julie -

Thanks for this info.  I bet few really know how to - legally - take advanage of this.  It makes the kids feel useful (goodness knows!), and helps your business as well.

DEAN & DEAN'S TEAM CHICAGO

September 24, 2008 02:15 PM #8
Rainmaker
449,396
Tim Maitski
Atlanta Communities Real Estate Brokerage - Atlanta, GA
The Agent Who Uses "Watermelon Tough" Sign Posts

I heard of a great idea as far as hiring your kids.

Use them as models for some of your marketing.  Pay them a modeling fee.  Some models command high fees.

September 24, 2008 03:04 PM #9
Ambassador
1,505,896
Tammy Lankford
Lane Realty - Eatonton, GA
Your Lake Sinclair Expert (706-485-9668)

This is a great post.  I in fact did hire my daughter through a corporation when she was only 8.  Besides the fact that I paid her 12 years now monies that were dectuable for me  I have given her a HUGE head start with two things.  1- earning the quarters she needs for SS.  If she becomes disabled she would qualify for disabilty now...

2- I have put up several ROTH IRAs for her and now she will NEVER have to pay more taxes on that money.  She earned it and paid minimal taxes on it, funder her IRA and could possibly be actually prepared for retirement before she is 60.

More people who are self employed or own a corportation should take advantage of this... before it changes and we can't do it anymore.

September 24, 2008 04:50 PM #10
Rainmaker
172,285
Real Estate Virtual Assistant & North San Diego County Real Estate Agent
Christine Wade - Vista, CA

Could I do this with someone else's kids, because mine are totally unmotivated!  LOL  This is a great option when the kids are older...rather than having my daughter work retail and walking out to her car in some dark parking lot after work, she can work from our home office for me!  Thanks for the post.

September 24, 2008 05:00 PM #11
Anonymous
Anonymous
Anonymous

Julie,

Let's play this one out for a sec... You're a tax expert and here's a blog I just read with a link for an interesting video.  The video is about an hour and a half long so pull up a chair.  Just watch the first 30 minutes and give us a comment if you don't mind... 

http://activerain.com/blogsview/707597/America-FREEDOM-to-FASCISM

I'm not advocating this by any means but an honest opinion from a tax professional would be cool to have...  I'm wondering if I should file at all this year!  :o)  J/K

Make it a great day!

September 24, 2008 06:03 PM #12
Anonymous
Anonymous
Anonymous

Great post, thanks, Julie!!!

September 24, 2008 06:23 PM #13
Ambassador
1,475,993
Renée Burrows
Savvy Home Strategies Realty, LLC-REALTOR®-Estate-Probate - Las Vegas, NV
Las Vegas Real Estate Broker - www.urLVhome.com

Uh, this is some good info as my kid is my employee for real!  I didn't realize that the bene's were this good.

September 24, 2008 06:58 PM #14
Ambassador
794,093
Russ Ravary
Keller Williams Commerce - Commerce, MI
Metro Detroit homes - Michigan Real estate & Mortg

Julie, 

thanks for the great tips.  It is a great way of keeping money in the family

September 24, 2008 06:58 PM #15
Rainer
10,139
Teresa Winchell
Bluewater Real Estate - Atlantic Beach, NC

We have thought about doing this...I will be checking in to it again and putting my kiddos to work.  They actually love coming down to the office with me and helping anyways.  Thanks for the reminder.

September 24, 2008 08:03 PM #16
Rainmaker
591,254
Valerie Osterhoudt
Johnson Real Estate, Inc. - Cromwell, CT
ABR, Cromwell, CT Real Estate ~ 860.883.8889

Julie.. Thanks for posting this.. Great information.  My sons are old enough to work yet, and things will probably change by the time the are old enough.. in 6 years.

valerie osterhoudt

September 24, 2008 08:36 PM #17
Ambassador
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Kathleen Daniels
KD Realty - 408.972.1822 - San Jose, CA
San Jose Homes for Sale - Probate Specialist

Julie - this is great information.  I have attended tax seminars which provided a wealth of information just like this. It's always good to learn tax reduction tips. Thanks for the post.

September 24, 2008 09:53 PM #18
Rainmaker
652,546
Bob & Carolin Benjamin
Benjamin Realty LLC - Gold Canyon, AZ
East Phoenix Arizona Homes

Interesting points for agents with kids who are at home but of working age,

September 24, 2008 10:08 PM #19
Ambassador
600,224
Roland Woodworth
Keller Williams Realty - Clarksville, TN
Short Sale and Foreclosure Resource- SFR - Clarksv

Julie.. this is very intersting information. Thank you for taking the time to share

September 24, 2008 11:09 PM #20
Rainmaker
250,466
Joel Weihe
Realty World Alliance - Wichita, KS
Helping you to use your VA home loan benefits

7, huh?   Guess I have a couple of years.  I actually do use my 5yo sometimes.  He's modeled for me for marketing, but he's also been my office runner, running things to the receptionist from my office, fetching mail out of my inbox, and testing the plumbing (lol!).  

How do the child labor laws apply here?  I haven't looked them up in ages but thought there was something different for relatives.  I worked waaaaay more than allowable for my own pop. 

September 24, 2008 11:17 PM #21
Rainer
2,746
Julie Bohn
Julie L. Bohn, CPA - Englewood, OH
Helping Agents Reduce Their Taxes

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 #22
Anonymous
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 #23
Rainmaker
1,350,900
Charles Stallions
Charles Stallions Real Estate Services - Pensacola, FL
800-309-3414 - Pensacola, Pace or Gulf Breeze, Fl.

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 #24
Rainer
290,847
Richard & Carol DeGrace
1st Colonial Community Bank | Bank - New Jersey - Cherry Hill, NJ
Mortgage Loan Officers NJ 609-209-3700

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 #25
Rainer
35,981
Kristin Hunteman
Coldwell Banker Gundaker - Saint Charles, MO
CDPE, SFR, CSSA, ABR

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 #26
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Rainer
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Julie Bohn

Helping Agents Reduce Their Taxes
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