Are you aware of the tax breaks available when hiring your children in your family business? Not only can it be financially advantageous to employ family members instead of strangers, but it also offers tax-saving opportunities. Let’s explore the various tax breaks for hiring your children and how it can positively impact your family business.
Child Under the Age of 19 or a Student Under the Age of 24
One key aspect to consider is that when a child under the age of 19 or a student under the age of 24 is claimed as a dependent, they may be subject to the kiddie tax rules if their investment income exceeds $2,500. However, earned income (income from working) is taxed at the child’s marginal rate, presenting an opportunity for tax savings.
Tax on a Child’s Earned Income
By employing a child in your business and paying them a reasonable salary, you can effectively reduce your self-employment income and tax as a parent and shift income to the child. This strategy allows you to pay your child with tax-deductible dollars, minimizing the impact on your after-tax income.
Deduction for the Business
When hiring your children, it is crucial to ensure that the employment is legitimate, and that the compensation aligns with the hours worked and the job performed. By doing so, you can deduct their wages as a legitimate business expense, further reducing your taxable income.
Employment Taxes
Another benefit of hiring children under the age of 18 in an unincorporated business is the exemption from FICA taxes (Social Security and Medicare taxes). This exemption applies to services performed by a child under 18 while employed by a parent, eliminating the need for the child and the business to pay FICA taxes.
IRAs and Retirement Plans
Hiring your child also opens doors to retirement plan savings. If the child is paid more and deposits the extra earnings into a traditional IRA, they can make a tax-deductible contribution of up to $6,500 for 2023. Additionally, depending on the type of retirement plan your business utilizes, the child may be eligible to receive retirement plan benefits. By combining deductions and contributions, a child could earn wages up to $20,350 and pay no income tax.
Incorporated businesses and partnerships that include non-parent partners may not be eligible for certain exemptions and benefits, but for many family businesses, these tax breaks can provide significant savings and advantages.
Tax Breaks for Hiring Your Children – A Smart Strategy
In summary, hiring your children in your family business can result in substantial tax savings while keeping the employment within the family. By paying reasonable wages, you can reduce your self-employment income, shift income to your child, and potentially qualify for exemptions from employment taxes. Furthermore, exploring retirement plan options can enhance the long-term benefits for both your child and your business.
If you have questions about tax breaks for hiring your children or other related tax benefits, reach out to our office for professional guidance. We are here to help you maximize your tax advantages and ensure compliance with the relevant regulations.