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  • Writer's pictureChristopher Youngblood

Do you Wanna Lower Your Tax Bill? Hire Your Kids!


Black youth at work/Project 21


You decide to scroll through Instagram and notice an image in big, bold letters about hiring their kids to lower their tax bill. You shake your head, thinking, “Here’s another of those LLC Twitter quotes that so-called financial gurus used to scam people.” However, it is far from a scam, as business owners can hire their offspring for legitimate tax benefits.


According to the IRS:

Payments for the services of a child under age 18 who works for his or her parent in a trade or business are not subject to social security and Medicare taxes if the trade or business is a sole proprietorship or a partnership in which each partner is a parent of the child. Refer to the “Covered services of a child” section below. Payments for the services of a child under age 21 who works for his or her parent in a trade or business are not subject to Federal Unemployment Tax Act (FUTA) tax. Payment for the services of a child are subject to income tax withholding, regardless of age.


You can hire your kid(s) on a part or full-time schedule in layman’s terms and pay each child up to $12,400 to exempt them from paying Social Security, Medicare, or Federal Unemployment.

HOW DOES THIS BENEFIT MY BUSINESS AND KIDS?

  1. You can deduct their salary ($12,400) from your business expense, thus lowering your taxable income.

2. Why exactly $12,400? That is the standard deduction from a single taxpayer’s taxable income. Since the child only made $12,400, the standard deduction will reduce their federal taxable income to 0.

3. With up to $12,400 of tax-free money, you can transfer it to a saving account or an IRA for your child until they become an adult.


Picture yourself running a barbershop, and you want to teach your 13-year old son the value of hard work. You set a schedule for him to work 15 hours a week at $10 an hour to sweep the floors. By the end of the year, he has earned $7200, which you can subtract from business expenses. Plus, since it’s less than the standard deduction, your son will not have to pay any taxes on it.


While this is a legit tax strategy, you still want to make sure you follow the IRS rules. They will check and see if your child-employee is authentic and performing realistic duties for their age (They will find it hard to believe that a 12-year-old is responsible for balancing your checkbook). Here are a few examples of what your kid can do:

  • Clean windows

  • Organizes files and paperwork

  • Managed your social media accounts

  • Run errands (food, post office, etc.)

  • Open and greet guests/customers.

Being able to work with your kids has advantages outside of financials. You get to instill a work ethic and teach them how to conduct themselves in a work environment. Plus, you get the blessing or more time to bond and build the generational wealth you desire. Remember, keep everything legal and consult your accountant before putting your kid to work.


Resources


“Ideas for Hiring Your Children in Your Business — Tax Advantages.” Financially Simple, 2019, May 6th. https://financiallysimple.com/tax-benfits-hiring-your-child-in-your-business/

Jones, Keith L. CPA. “How To Hire Your Kids The Tax Smart Way” Keith L. Jones CPA, 2020, August 22. https://keithjonescpa.com/hire-your-kids






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