Why Aren’t More Small Business Owners Paying Their Kids? Unlock a Hidden Opportunity!
If you’re a small business owner with kids under 18, you might be overlooking one of the smartest financial strategies out there. Imagine lowering your tax bill, teaching your kids valuable life skills, and helping them build financial security—all at once. It’s not only possible, but it’s also completely legal!
By paying your kids for their legitimate work, you can gain significant tax advantages while instilling responsibility and financial literacy. Let’s explore why this is a win-win for your family and your business.
Can I Really Pay My Kids as Employees?
Yes, you can! The IRS allows you to employ your children as long as their work is legitimate and their wages are reasonable for the tasks they perform. Whether it’s helping with filing, managing your social media, cleaning, or assisting with property maintenance, there are countless ways for your kids to contribute.
Here’s the best part: if you operate as a sole proprietorship or a family-owned LLC, you don’t need to withhold payroll taxes for your kids under 18. Plus, their income is tax-free up to $13,850 in 2024, thanks to the standard deduction.
What Are the Tax Benefits of Hiring Your Kids?
The financial benefits are undeniable. Here’s what makes this strategy so compelling:
- Deductible Wages: Payments to your kids count as a business expense, lowering your taxable income.
- Tax-Free Earnings: Your kids can earn up to $13,850 tax-free in 2024, and this amount may increase in future years due to inflation adjustments.
- Payroll Tax Savings: If your kids are under 18 and your business is a sole proprietorship or family-owned partnership, you’re not required to pay Social Security, Medicare, or Federal Unemployment (FUTA) taxes.
- Wealth-Building Opportunities: Their earnings can be invested in a Roth IRA, giving them a powerful head start on long-term financial growth.
This isn’t just about tax savings—it’s also a chance to teach your kids the value of earning and managing money.
How Much Can I Pay My Kids Without Triggering Payroll Taxes?
For children under 18, the rules are simple: you can pay them up to $13,850 in 2024 without any payroll taxes, provided you operate as a sole proprietorship or family-owned partnership.
For kids 18 or older, payroll taxes do apply. You can decide whether to pay them as an employee (W-2) or as a contractor (1099-NEC). Just ensure their classification complies with IRS guidelines to avoid penalties.
What Kind of Work Can My Kids Do?
The possibilities are vast, as long as the tasks directly benefit your business. Here are a few examples:
- Office Work: Filing, organizing, or managing schedules.
- Marketing Tasks: Creating social media posts, designing graphics, or helping with email campaigns.
- Property Maintenance: Cleaning, landscaping, or performing small repairs.
- Inventory Management: Counting, organizing, or restocking items.
Be sure their responsibilities are appropriate for their age and skill level. Tasks like basic household chores won’t qualify, so keep it strictly business-related to avoid IRS scrutiny.
Are There Age Restrictions?
There’s no minimum age for hiring your kids as long as the work is suitable for their age and maturity. However, child labor laws still apply, so ensure compliance with both federal and state regulations. Tasks should be safe, reasonable, and add real value to your business.
Steps to Get Started
- Assign Legitimate Tasks: Ensure their work directly benefits your business.
- Pay Reasonable Wages: Their pay should align with what you’d pay an unrelated employee for the same tasks.
- Document Everything: Keep thorough records, including timesheets, job descriptions, and payment logs.
- Use the Right Business Structure: If you operate as an S-Corp or C-Corp, consider paying your kids through a sole proprietorship or family-owned LLC to maximize savings.
If you have grandchildren helping your business, there’s a similar approach you can use. Check out my article “Paying Your Grandchildren for the Business” for details.
Why This Strategy Works
This approach is about so much more than just lowering your tax bill. By hiring your kids, you:
- Reduce your taxable income.
- Teach your children valuable skills like responsibility and financial management.
- Set them up for success with retirement savings and wealth-building opportunities.
Whether their earnings go toward a Roth IRA, education savings, or simply learning the value of hard work, this strategy benefits your entire family.
So why wait? Start tapping into this hidden gem and enjoy the rewards today!