The Tax Benefits of Putting Your Kids on Your Payroll

The family that works together, saves money together

What are your kids doing this summer? While they may just plan on relaxing or having fun with school out, it might be good for them – and you – if you put them to work. Not a lot of business owners know this, but they can get a pretty nice tax break by hiring their own children.

How it works

If you run a business and can find legitimate work for your kids who are under age 18, you can pay them up to $12,000 per year and they won’t have to pay any income tax. The benefit for you is that you will not have to worry about worker’s comp or unemployment insurance.

And, depending on the structure of your business, you may not have to pay any payroll taxes either. The companies that fall into this category are sole proprietorships, LLCs taxed as disregarded entities, and LLCs taxed as partnerships and owned by you solely. This does not apply to corporations, however, though they may be able to do something about that:

How corporations can get around this

With the right strategy, an S Corp or C Corp business may not have to pay payroll taxes on the income of children either. In order to do this, you would need to create a family management company, which would be set up as a sole proprietorship separate from your corporation. You would then pay your children out of this company. And as a sole proprietorship, it would be exempt from having to pay those payroll taxes.

Additional tax benefits

With a child – or children – on your payroll, you get to move income into their lower tax bracket from your higher one. You can also take advantage of business deductions to reduce your tax liability even more.

Just remember that it has to be real work

The word “legitimate” used earlier should not be taken lightly. This means that doing chores around the house will not count. What you hire your kids to do should be directly related to your business, but this doesn’t have to involve anything too complex or taxing.

Mowing a lawn or otherwise taking care of the landscaping would work. They could also do simple tasks like filing or shredding old documents. And if they have some tech skills, you may want to utilize them for your website or social media networks. A younger child who becomes part of your advertising campaign may qualify. Just remember to carefully document exactly what you have them do.

What about paying a spouse?

Another family member some business owners are often eager to put on their payroll is their spouse. But, in many cases, this doesn’t always make good sense. For one thing, you probably won’t save any money on taxes.

If you plan to file a joint return, paying your spouse may give you a business write-off, but it counts as income on your personal return. Plus, there are the payroll taxes to think about. And as for Social Security, in most cases, it is more beneficial for a spouse to claim the spousal benefit than their own.

Questions about putting the family on your payroll? Contact Provident CPA & Business Advisors

Provident CPA & Business Advisors serves successful professionals, entrepreneurs, and investors who want to get more out of their business and work less, so they can make a positive impact in their lives and communities.

Typically, our clients reduce their taxes by 20 percent or more and create tax-free wealth for life. Contact us for expert advice on the new tax code, and to find out how we can help your business exceed your expectations.