Hiring your children to work in your business can be a win-win situation for everyone. Your kids will earn money, gain real-life experience in the workplace, and learn what you do every day. And, you will reap a few tax benefits in the process. Before you decide if hiring your child is the right thing for your business, learn if it can work for you.
Generally, if your child is doing a legitimate job and the pay is
reasonable for the work, his or her salary can be a tax-deductible business
expense. Your child’s income can be tax-free to them up to the standard
deduction amount for a single tax payer ($6,350 in 2017). Wages earned in
excess of this amount are typically taxed at your child’s rate, which is likely
lower than your rate.
The following guidelines will help you determine if the arrangement
will work in your situation:
- Make sure your child works a real job
that he or she can reasonably handle, no matter how basic or simple.
Consider tasks like office filing, packing orders, or customer service.
- Treat your child like any other
employee. Expect regular hours and appropriate behavior. If you are
lenient with your child, you risk upsetting regular employees.
- To avoid questions from the IRS, make
sure the pay is reasonable for the duties performed. It’s not a bad idea
to prepare a written job description for your files. Include a W-2 at
year-end.
- Record hours worked just as you would
for any employee. Pay your child using the normal payroll system and
procedures your other employees use.
- Hiring your children works best if you are a sole proprietor. It has additional tax benefits not available if your business is organized as a C corporation or an S corporation.
If you have questions, give us a call at (518) 798-3330. Together we can determine if
hiring your child is the right course of action for your business and your
family.
