A Smart Way to Save on Taxes While Teaching Valuable Skills

As a business owner, finding creative ways to lower your tax burden is always a priority. But did you know that one of the most effective strategies could involve your own family? By employing your child in your business, you’re not only teaching them valuable life and work skills but also tapping into a powerful tax-saving strategy that can benefit your bottom line.

Thanks to the Tax Cuts and Jobs Act (TCJA), this approach has become even more advantageous. Let’s explore how employing your child can help you keep more of your hard-earned money.

How Does Employing Your Child Work?

This strategy is simple yet incredibly effective. Here’s the core idea:

1. Hire your child for legitimate work in your business.

2. Pay them a reasonable wage for their duties.

3. Deduct their wages as a business expense.

For example, if you pay your child $8,000 for tasks like filing paperwork, organizing receipts, or maintaining your website, that $8,000 becomes a fully deductible business expense—reducing your taxable income significantly.

The Tax Advantages of Employing Your Child

Here’s why this strategy works so well:

1. Tax-Free Income for Your Child:
   The TCJA increased the standard deduction for individuals, meaning your child can earn up to $13,850 (for 2023) tax-free. Any wages paid up to this threshold are entirely shielded from federal income tax.

2. Payroll Tax Savings:
   Children under 18 employed by their parents in a sole proprietorship or single-member LLC are exempt from Social Security, Medicare, and federal unemployment taxes. This exemption keeps more money in your pocket.

3. Business Expense Deduction:
   As a business owner, you deduct your child’s wages as a legitimate business expense, lowering your taxable income.

4. Family Income Optimization:
   By shifting income to your child, who is in a lower tax bracket (or owes no taxes at all), you’re effectively redistributing family income in a tax-efficient way.

Real-Life Example: How a Business Owner Saved Thousands

Let’s meet Sarah, a single-member LLC owner and REALTOR®. Sarah hired her 12-year-old son, Alex, to help with social media content and organize client files. She paid Alex $8,000 over the course of the year.

• Sarah deducted $8,000 from her business income, saving approximately $3,042 in taxes (based on her 38% combined tax rate).

• Alex, earning below the standard deduction limit, paid zero taxes on his income.

• The family saved over $3,000 while Alex learned invaluable skills in budgeting and work ethic.

What Types of Work Can Your Child Do?

To qualify, your child must perform tasks appropriate for their age and skills. Here are some ideas:

• Filing paperwork or organizing office supplies.

• Managing your social media accounts.

• Cleaning or maintaining your workspace.

• Designing promotional materials.

• Answering emails or scheduling appointments.

Tip: Ensure the work is genuine and document their tasks to satisfy IRS requirements.

How Does Your Business Structure Impact This Strategy?

The benefits of employing your child vary based on your business structure:

1. Sole Proprietorships and Single-Member LLCs:
   These entities enjoy the most significant advantages, including payroll tax exemptions for children under 18.

2. Partnerships:
   If both parents are partners, the same payroll tax exemptions apply.

3. S Corporations and C Corporations:
   These entities still benefit, but payroll taxes may apply. However, the ability to shift income to your child remains a powerful incentive.

Pro Tip: Consult with a tax advisor to tailor this strategy to your specific business structure.

How to Set Up This Tax-Saving Strategy

Here are the steps to implement this strategy effectively:

1. Define Their Role: Clearly outline the tasks your child will perform in your business.

2. Set a Reasonable Wage: Pay your child a fair wage for the work performed, consistent with industry standards.

3. Document Everything: Keep a record of their hours, tasks, and payments.

4. Use Payroll Systems: Even for family, proper payroll processing is essential to demonstrate compliance with tax laws.

Compliance Tips: What the IRS Looks For

The IRS expects the following:

• Bona Fide Role: The child must perform actual work that benefits the business.

• Reasonable Compensation: Pay them a fair market wage, not excessive amounts.

• Documentation: Maintain time sheets, task descriptions, and payment records.

When done right, this strategy stands up to IRS scrutiny and delivers significant savings.

Why Now Is the Perfect Time to Act

With the tax benefits enhanced under the TCJA, employing your child is more lucrative than ever. Not only does this strategy allow you to reduce taxes, but it also creates opportunities for your child to develop real-world skills. Plus, you’re keeping more money within your family while reducing your overall tax liability.

Ready to Explore This Strategy Further?

Employing your child is just one of over 150 tax-saving strategies we use to help clients like you keep more of your hard-earned income. Join our free webinar to learn how to implement this approach and uncover additional opportunities to maximize your savings.

Don’t wait—register today and start saving tomorrow! Sign up here.