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Can I Hire My Child For the Family or Home Business?

Updated: Jul 15, 2021

There has been quite the internet buzz about the tax benefits of taxpayers hiring their children for their small family or home-based business. Can it be done? Sure! But there are rules to follow. Unfortunately, the thing with following internet buzz and not consulting with professionals can case you up for a world of liability such as child labor law fines both federally and state wise if you don't follow the rules, tax penalties if the filing was done incorrectly, and the loss of business deduction.

What is the benefit?

The Tax Cuts and Jobs Act increasing the Standard Deduction up to $12,200 (in 2019), children employed in a family business can earn that much in income and enjoy a 0%(!) tax rate on their income (at least for Federal tax purposes), all without facing the Kiddie Tax (which only applies to unearned income). In addition, many states will also permit children employed in the business to avoid unemployment (FUTA) taxes, and children working for their parents’ sole proprietorship, partnership, or LLC may also avoid employment (FICA) taxes as well (which can be a material tax savings for many families, and especially those with high-income parental business owners).

The Catch?

The caveat, though, is that employing a child in the business still requires that he/she do bona fide (age-appropriate) work in the business (i.e., a “real” job), for a “reasonable” (and not excessive for tax purposes) wage. The work must also comply with both Federal Fair Labor Standards Act (FLSA) rules (which fortunately are fairly flexible for parents employing their children in their own wholly-parental-owned business), and state child labor laws as well.

How does this benefits the taxpayer?

The biggest, and most obvious benefit to hiring a minor child in the family business, is the ability to shift income from what is presumably the parents’ higher income tax rates, to the child’s (presumably lower) rates. And thanks to the Tax Cuts and Jobs Act’s roughly “doubling” of the standard deduction, children are able to have more income than ever taxed at a 0% rate! How? Example: In 2019, the standard deduction for individual filers is $12,200. Children can earn up to $12,200 from employment.

Child reported income: $12,200

less standard deduction -$12,200

=no Federal income taxes $0

You would typically use this method when you meet the income threshold of no longer qualifying for the Qualified Business Income (QBI deduction). If you meet the QBI qualification and still want to hire your children, you may want to consider paying them as regular employees and give them a jump start in saving for retirement and earning social security quarters. Otherwise, children will not earn any social security credits using this method.

Can I use this method if my business is a corporation?

  • A corporation (including Scorp), even if it is controlled by the child's parent,

  • A partnership, even if the child's parent is a partner, unless each partner is a parent of the child, or

  • An estate, even if it is the estate of a deceased parent.

What is the age requirement?

As mentioned before, you must follow the rules both federally and state-wise. There really isn't a stated age at the federal level, but it is accepted that the typical starting age is around 7 when the child can actually do work. There are exceptions for child models and actors. We all think the world of our children, but if your business landscaping or making cupcakes, you can't equate your child's work with that of Blue Ivy or child actors on Disney because you use their image on your flyer or other advertisements. Which brings us to wages.

How much do I pay my child in wages?

You must pay your child a REASONABLE RATE for doing REASONABLE WORK. You can go by the federal or state minimum wage. For example, you hire your child to do landscaping at your business. You pay $25 per hour for the work. However, the average wages for landscapers in your area is $10 per hour. Paying your child $25 per hour is probably not reasonable.

You can NOT pay them with hugs and kisses, pay for their summer camps, or school supplies and count that as salary. You MUST deposit the child wages in the child's bank account, college savings account, trust account, or an account that shows a paper trail of you paying them.

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