The Benefits of Employing Your Children and the Tax Breaks Involved

It’s important to teach your kids to manage money wisely and have a solid work ethic. One way to accomplish this is by employing your child. Not only will this teach them essential skills, but it also comes with tax breaks you can take advantage of as well.

According to the IRS, if you are self-employed or own a business, you can employ your child and deduct their wages as a business expense which in turn reduces your taxable profit. Additionally, payments for the services of a child are not subject to social security, Medicare or FUTA taxes if you operate an unincorporated business. This means you won’t have to pay FICA or FUTA taxes on the salaries you pay your children while they are under 18. Lastly, your child will likely be in a lower tax bracket than you, which means they will pay less tax on their income. This results in less withholding burden for your business, if applicable.

Regarding federal income tax, you can hire and pay your child up to $15,750for the year (per child), and they will not be subject to federal income tax for 2025. If your child has other income, even if you pay them up to $15,750, they may still need to file their own tax return if they exceed the filing threshold. 

There are a few rules and requirements to follow when employing your child. First, they must be a legitimate employee and perform actual work for the business. This means you can’t just pay them for doing household chores and include them on your business payroll. They must have a specific job in your business and be paid a reasonable wage for the work they do.

Next, you must keep accurate records of employment, including timesheets with the hours your child works and their payments. This is important to ensure you can prove to the IRS that the wages you pay them are reasonable and that they are actually performing work for the business.

You can also help your child to do more with their salary by starting to save early for retirement with investments in a retirement savings account (401k or IRA), a Coverdell Education Savings Account, or a 529 plan.  

Employing your child comes with numerous benefits beyond just the tax breaks. It can teach them valuable skills that will serve them well in the future. They will learn about responsibility, time management, and the value of hard work. It can also give them a sense of pride and accomplishment, knowing that they are contributing to the family business.

If you own a business, consider employing your child and taking advantage of the tax breaks that come with it. Not only will it benefit your business, but it can also be a great way to teach your child about work ethic and financial responsibility.

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