Hiring your child in your family business can be a rewarding way to teach them responsibility while also providing substantial tax benefits for both you and your child. By paying them a salary, you can deduct it as a business expense, effectively reducing your taxable income. Meanwhile, your child can earn up to the federal standard deduction amount tax-free. However, to ensure these tax benefits, it’s crucial to follow IRS guidelines and comply with labor regulations. Let’s explore how this works.

Tax and Entity Regulations for Hiring a Child

1. Tax-Free Earnings

In 2024, a family business owner can pay their child up to \$14,600 without incurring any additional federal income tax liability. This amount aligns with the standard deduction, allowing children to earn it tax-free. Additionally, since your child now has earned income, they can contribute to a Roth IRA—an excellent opportunity to jumpstart their retirement savings early.

2. Entity Structure Considerations

The structure of your business can affect the tax treatment of wages paid to your child:

– For a wholly owned business or a partnership between spouses, wages paid to children under 18 are exempt from Social Security and Medicare taxes. Additionally, wages paid to children of any age are exempt from Federal Unemployment taxes until the child turns 21.

– However, if the business is an incorporated entity, such as an S Corporation, wages paid to children are subject to Social Security, Medicare, and Federal Unemployment taxes, regardless of the child’s age.

3. IRS Requirements

To qualify for these tax benefits, the IRS requires you to adhere to specific guidelines:

– Appropriate Work and Pay: The job must meet a business need, be age-appropriate, and provide a fair market wage.

– Proper Record-Keeping: Maintain detailed records, including duties, hours worked, wages, and any payroll taxes.

– Employee Documentation: Your child must be treated like any other employee, which includes completing tax forms and tracking hours and tasks.

4. Child Labor Laws

Federal labor laws, such as the Fair Labor Standards Act (FLSA), apply to most businesses and impose restrictions on the hours and tasks allowed for minors, particularly those under 16. Some states may have stricter child labor laws, so be sure to check your state’s specific regulations.

By following these guidelines and regulations, you can achieve tax savings while ensuring compliance with legal standards.

 Suggested Roles by Age

If you’re considering hiring your child, here are some potential roles based on their age:

Ages 5-7: Sorting, filing papers, light cleaning, supervised data entry.

Ages 8-10: All of the above plus stocking inventory, answering phones, labeling, and helping at events.

Ages 11-13: All of the above plus customer service assistance, basic social media tasks, and bookkeeping.

Ages 14: All of the above plus administrative tasks, more complex computer work, marketing help, and inventory management.

And let’s not forget, modeling for your marketing materials is always an age-appropriate job for any child!

Benefits Beyond Tax Savings

Hiring your child is more than just a tax-saving strategy; it’s an opportunity to instill valuable work habits, foster financial responsibility, and help them gain early work experience. With the right approach, you can enjoy financial benefits while teaching your child life skills that will serve them well into adulthood.

Additional Considerations for Hiring Your Child

1. Building Financial Literacy

Hiring your child also provides an opportunity to teach them about personal finance. You can involve them in managing their earnings, understanding taxes, and saving for future expenses. Encouraging your child to save a portion of their salary or contribute to a Roth IRA can set them on a path to financial independence.

Financial literacy is an important skill that can benefit children well into adulthood. Involving your child in decisions about how to allocate their earnings—whether saving for a significant purchase, investing, or giving to charity—can teach them about budgeting and financial priorities. This hands-on experience can lead to a deeper understanding of money management and help set them up for future financial success.

2. Creating a Realistic Work Environment

To make the experience valuable, ensure your child understands workplace expectations. Set clear goals, provide feedback, and help them learn how to solve problems. By doing so, you’re not just saving on taxes but also preparing your child for future employment by fostering a strong work ethic.

A realistic work environment involves having your child follow the same rules as any other employee, including adhering to schedules and meeting performance expectations. By doing this, you’re helping them understand professional responsibilities, punctuality, and accountability. This structured approach not only helps them build essential work skills but also makes them more adaptable in future job settings.

3. Teaching Business Skills

Working in the family business exposes your child to fundamental business operations. This exposure can help them understand various aspects of running a business, such as customer service, inventory management, and marketing. These skills will be invaluable, whether they decide to join the family business full-time in the future or pursue their own career path.

Teaching children about the core aspects of running a business can also inspire entrepreneurial thinking. By learning about marketing strategies, customer relations, and the challenges of managing a business, they can develop a deeper appreciation for the work that goes into building and sustaining a successful enterprise. It also empowers them with the skills needed to potentially start their own venture someday.

4. College Savings

The money your child earns can also be used to save for college expenses. By setting up a 529 plan or using earnings to contribute to educational savings, you can reduce the burden of future education costs. The experience of earning their own money can also help children appreciate the value of their education.

Involving your child in saving for their education can help them take ownership of their future. As they contribute to a 529 plan or other savings accounts, they’ll gain an understanding of how consistent savings can lead to long-term benefits. Additionally, having savings for college can reduce their need for student loans, minimizing debt as they start their adult life.

5. Documenting Compliance

To avoid issues with the IRS, it’s important to keep thorough documentation. This includes timesheets, descriptions of duties, and payment records. These documents demonstrate that your child’s employment is legitimate and that wages paid are reasonable and appropriate for the work performed.

Accurate record-keeping is essential not only for meeting IRS requirements but also for general business transparency. Detailed records of your child’s work can also be helpful in tracking their progress and evaluating their performance over time. Keeping clear documentation ensures that your business remains compliant with all applicable laws and can withstand any scrutiny regarding the legitimacy of your child’s employment.

6. Creating a Work-Life Balance

While it is beneficial to involve your child in the family business, it’s also important to ensure they maintain a healthy balance between work, school, and play. Overworking a child can lead to burnout and may negatively impact their attitude towards work in the future. Make sure they have ample time to focus on their education, hobbies, and relaxation.

Striking a balance between work and personal life is a lesson that extends beyond childhood. Encouraging your child to manage their time effectively between work responsibilities and other activities teaches them about prioritization and self-care. This balance can contribute to their overall well-being and long-term productivity.

7. Long-Term Career Development

 

Hiring your child in the family business can be a starting point for their long-term career development. This experience can serve as an introduction to the world of work, helping them build a resume and develop skills that are marketable in many industries. Even if they choose a different career path, the early exposure to professional responsibilities will be an asset.

Consider working with your child to set career goals, whether within the family business or beyond. As they gain experience, discuss their interests and aspirations, and explore how their role in the business can help them achieve these goals. This proactive approach can foster a sense of purpose and direction in your child’s career journey.

Final Thoughts

Ready to unlock valuable tax savings while teaching your child essential life skills? Hiring your child in your family business not only offers tax benefits—like reducing your taxable income and allowing your child to earn tax-free income up to the standard deduction—but also provides them with hands-on work experience. Following IRS guidelines is key to reaping these rewards.

By understanding the tax implications, business structure requirements, and labor laws, you can make hiring your child both financially advantageous and personally fulfilling. This approach offers more than tax savings — it teaches work habits, financial literacy, and valuable business skills. With thoughtful planning, you’re not only building a foundation for your child’s future but also creating shared experiences and stronger family ties. Contact us to learn how to put this strategy to work in your family business!

 

This post serves solely for informational purposes and should not be construed as legal, business, or tax advice. Individuals should seek guidance from their attorney, business advisor, or tax advisor regarding the matters discussed herein. Provident CPAs assumes no responsibility for actions taken based on the information provided in this post.