Hiring your children and family members is one of the most powerful tax strategies used by entrepreneurs today. Many people don’t realize that their children or grandchildren, whether they’re under 18 or adults, are the most affordable labor. More importantly, it’s an excellent strategy to minimize tax liability and enjoys a host of other ancillary benefits, such as help children become self-reliant, teach small-business ownership skills, etc.

It’s important you follow the right procedure when paying your kids who are under 18, or this strategy could backfire on you. Keep in mind when hiring, your children must be legitimately involved in the business and the payments must be “reasonable”. You will want to keep records of their time working as well as pay them a reasonable wage. I recommend having a clear job title and description for the child and keeping track of their tasks. The two major tax benefits for hiring your children are as below:

First, you don’t have to withhold any income or payroll taxes. This also applies to workers’ comp as well as state and federal unemployment insurance. The reason is that the government and insurance carrier assume your children won’t sue you if they are hurt on the job – at least we hope not. Your children are also probably on your health insurance plan; you’ll end up paying the bill one way or another. Still, I recommend you review the laws in your jurisdiction to ensure you are operating legally regarding workers’ comp and other payroll taxes as well as work permits and other regulations.

Second, don’t pay taxes on the first $12,400 they earn in 2020. It’s the standard deduction that is adjusted for inflation each year. However, you can still claim your children as dependents on your tax return and take the child tax credit if you qualify.

Therefore, when you pay your children for services they perform in your business, you can generate an expense for your income taxes by pushing income to your children.

The IRS allows any sole prop or partnership (LLC) that is wholly owned by a child’s parents to pay wages to children under 18 without having to withhold payroll taxes. However, if you have an S or C corp, be careful of this strategy. You do not receive the benefit of avoiding FICA when paying your children unless you pay them through a sole prop or an LLC owned solely by mom and dad. Please consult your own CPA/Accountants for more details.

Disclaimer: We are a real estate investment company and we are not a CPA or attorney. The article is just for information purposes. Do not rely on it for tax advice. Always consult with your CPA before you rely on the above information.