Hiring your kids? Consider these factors before making them an employee or intern
Many small businesses are also family businesses, and there are important family members you should consider for employment: your children. Maybe they already pitch in and do chores around the office, or perhaps they’re old enough to take on more responsibility answering phones, taking orders or even serving as an intern. Hiring your children can be a tax advantage for small businesses too, if you do it right.
Tax breaks for hiring your children depend on your business structure. The following pertains to sole proprietorships and partnerships or limited liability companies (LLC) where both parents are partners. (Tax laws can change, and if you are incorporated, rules may vary. Always consult your tax advisor for the most up-to-date tax information.)
What are the possible tax benefits?
- You can deduct your child’s salary as a business expense on your business tax return.
- Children under 18 are exempt from Social Security and Medicare (FICA) taxes.
- Children under 21 are exempt from federal unemployment (FUTA) tax.
- The child can use the standard deduction, paying no federal income tax on his/her first $6,100 in wages.
- Deducting your child’s salary can also lower your federal income tax and possibly your self-employment tax and state income tax.
- The child can save part or all of his/her wages toward college expenses, for example in a Roth IRA or Section 529 college savings plan.
- You’ll be keeping more money in the family than if paying outsiders.
- Your child will gain valuable work experience.
Follow the rules!
As with any business expense, it’s important to keep accurate records to support information on your tax returns. The same is true for hiring your child. The rule of thumb is to treat your child as you would any other employee:
- Your child must have a completed W-4 form.
- Your child will also need a Social Security number.
- Your business must have a federal employee identification number (EIN).
- You must issue a W-2 that shows your child’s wages for the year.
- You must complete U.S. Citizenship and Immigration Services (USCIS) Form I-9 for Employment Eligibility Verification.
And don’t forget
- Make sure this is a real job. Have a written job description, have your child complete timesheets and conduct performance reviews. Treat them like an employee, not a child.
- Pay your child a reasonable wage for the work he/she does. An unusually high wage will raise red flags with the IRS and resentment within the company. If you are unsure about wages for a particular job, contact a local employment agency for information.
- It’s also a good idea to have your child sign an employment agreement that spells out their job responsibilities and working hours.
As with any tax-related matter, you’ll want to consult with your professional tax advisor to make sure you are complying with all the rules. For additional information, visit the IRS website section on family help.
There are also intangible benefits to having your children as employees. They will learn how to take on more responsibilities, know what it’s like to be in the workplace and take pride in being paid for their work. It can also help them decide if they want to follow in your footsteps in the family business or perhaps become entrepreneurs on their own.– Contributed by Kelly Burkart through a partnership with US Bank.
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