Parents who own businesses have a few tax incentives for hiring their children to work in their business:
Shifting income to a lower (or 0%) tax bracket: If you hire your child to work in the business, any wages paid to him/her will be deductible by the business. Suppose that your combined federal and state tax rate is 40%. If you pay your child $4,000 next year, the result is $1,600 in tax savings on your tax returns. What’s more, if your child has no other income, his/her income from your business will be sheltered by the standard deduction ($12,000 for single filers), meaning he/she will owe no tax on the wages you paid.
No payroll taxes for sole proprietors: If you operate your business as a sole proprietorship or single-member LLC and the child you hire is under 18, you are not required to pay Social Security, Medicare, or federal unemployment taxes on his/her wages.
Other fringe benefits: As an employee, your child will be eligible for other tax-free benefits you offer, such as participation in a 401(k) plan or educational assistance plan.
The IRA option: Since your child will have earned income, he/she will be eligible to put money into an IRA or Roth IRA. It’s important to note that the money put into one of these accounts does not have to come from the wages paid (i.e. you can fund your child’s IRA up to their earned income amount, within the applicable contribution limitations). This option can be the bedrock of a successful retirement strategy for your child, all before they leave for college.
There are many great options for small business owners when it comes to involving the family in the family business. If you have questions about any of this, or how to go about getting started, give me a call.