Harness the Power of Family: Smart Tax Strategies by Putting Your Kids on Payroll

She's Involved In Her Kids Lives

Small business owners continuously seek ways to optimize their operations and finances, often overlooking one of the most resourceful and beneficial strategies close to home: employing their children. Not only does this approach weave the family fabric into the business, it also unlocks significant tax advantages.

Understanding the tax benefits of employing your children in your small business

When you employ your children (particularly those under 18) in your family business, you’ll find a twofold tax benefit that is too valuable to ignore:

1. No withholding required:

If your children are under 18, the business is not required to withhold payroll or income tax. This means you do not have to navigate the complexities of additional tax for their work. (Refer to IRC Code Sec. 3121(b)(3)(A), IRC Reg Section 31.3401(a)(4)-1(b), and IRS Pub No. 15, (2011), p.10 for more details).

2. Standard Deduction:

In 2024, the first $14,600 of income is not subject to federal taxes for each individual thanks to the increased standard deduction provided by the Tax Cuts and Jobs Act (TCJA). This means your children can earn up to this amount and owe no federal income taxes. (For more information, check Rev Proc 2011-52, Sec. 3.11(1), 2011-45 IRB).

Benefits Beyond Tax Savings: Other bonuses from incorporating your kids into the business

Incorporating your kids into the business isn’t solely about tax benefits. It’s an opportunity for them to earn their own money and begin understanding the value of hard work. For younger children, it’s a chance to start a Roth IRA, which can grow over time and lead to substantial savings in their adult years. For the older children, they can contribute to a 401(k) and benefit from the compounding power of savings.

Making it Work Properly

To ensure the employment of your children remains an advantage rather than an audit risk, it’s crucial to manage the process properly:

– Real Work for Real Pay:

Assign your children legitimate tasks suitable for their age and pay them a reasonable wage for their work. Document their responsibilities and maintain a clear record of hours worked, just as you would with any employee.

– Formal Employment Agreements:

Treat the employment relationship formally. Have written agreements in place, similar to other employees, detailing job description, payment terms, and working conditions.

– Financial Literacy:

Use this as a teaching moment about financial responsibility. Help them manage their earnings and understand the importance of saving and investing.

Concluding thoughts: Can adding your child to payroll be a benefit for both their future and your small business tax savings?

Bringing your children into the business fold is more than a smart tax move; it’s a chance to teach them about entrepreneurship, responsibility, and financial independence.

With proper guidance and adherence to tax laws, this strategy can prove mutually beneficial for your family and business. Don’t overlook the potential sitting around your dinner table – it may just be your next great business asset.

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