UPDATED FOR 2022
As long as your kids are doing legitimate work for your business you can hire your kids.
As long as they’re doing legitimate work for your business, you can hire your kids and pay each of them up to $12,000 per year tax-free.
It’s true. And all of this while they earn a little money AND start saving for college or that first business. And it’s all tax-free.
So you may want to hire your child(ren) to work in your business. And you want to do it for many good reasons: to teach them about entrepreneurship, develop a strong work ethic, AND for the tax-free income — up to $12,000 per child.
You can hire your kids and pay each of them up to $12,000 per year tax-free. If you hire your son to stuff envelopes and your daughter to update your website then you get to lower your personal income by $24,000! Simply by engaging your children in the family business.
If they stay under this limit, they don’t even have to file a tax return, which means they don’t pay any income tax on it. And you get to deduct their wages, which lowers your business’ taxable income.
BUT WAIT. THERE'S MORE.
The IRS ACTUALLY Rewards You For It! Source: Publication 929 (2020), Tax Rules for Children and Dependents)
If you have children between the ages of 7 - 22, you can use this strategy to save some money. Here is how it works:
- Each of your children can be employed by your business and paid an annual wage of $12,000. This is an important amount because it is the standard deduction amount for single individuals.
- Your business gets to take a deduction for the payment, thus decreasing your taxable income.
- Your children will then file their own tax return, & since they only made $12,000 they pay no federal income tax because of the standard deduction of $12,000, their taxable income is ZERO.
- So the business gets to take a deduction, but the kids pay no federal income tax. It does not get much easier than that!
This strategy can also be combined with IRA and 401k strategies to really maximize the benefit. For instance, if you paid each child $12K each as salary. You could put $6K into an IRA that is deductible, and you can use their standard deduction to take their taxable income to zero.
In that case, your business can deduct $18K per child, but again, no taxable income.
If you want to save money then hire your kids and make sure you have them actually work!
Keep track of the hours and tasks your children perform and make sure it’s age-appropriate. DOL Rules Regarding Youth & Labor The IRS isn’t going to believe your 5-year-old earned $12,000 analyzing dental records. But that 5-year-old can model those pearly whites in photographs to be used on your website or brochure! It’s easy to document an “image agreement” that pays an ongoing licensing fee right from the start.
Using this strategy, rather than just dumping change into their jar, (money you likely paid personal taxes on) you’ve moved those taxable dollars from your tax rate to your child’s tax rate and bracket, which, is zero, and you still keep the money in the family!.
There are countless jobs kids can do for you, and remember, you can pay them at the SAME RATE you would pay any other employee or outsourced company.
- Cleaning the office
- Washing company cars
- Updating customer lists on the computer
- Simple to advanced Data-entry
- Transcribing video or audio
- Trips to the post office or general errands
- Helping at the office, passing out handouts, and more
- Walking door to door, placing fliers for your business
- Updating your social media accounts (They won’t even equate this as work!)
But then, let’s say after reading the guide, you find out that this strategy “doesn’t work” if your business is a corporation.
The Corporation “Problem,” and Its Simple Solution to Hire You Kids
There are different rules for different types of businesses. And that when the owners of a corporation hire their child, there are still payroll taxes like FICA to deal with.
We even pointed this out in your free guide. See for yourself:
FICA tax may not have to be withheld on work performed by a child under the age of 18 while employed by a parent in an unincorporated business (sole-proprietorship, single member LLC or a partnership where the only partners are the child’s parents). However, there is no FICA or FUTA exemption for employing a child in an incorporated business (S or C Corp) or in a partnership that includes non-parent partners. In these cases, the children are subject to the same withholding rules that apply to all other employees.
So you DO NOT have to pay payroll taxes for employing your kids if your business is a sole-proprietorship, a single-member LLC taxed as a disregarded entity, or an LLC taxed as a partnership and owned solely by you and your spouse.
But if your business is a corporation, the IRS’s rules are clear. You must pay payroll taxes on income given to your children.
So are you stuck if your small business is set up as an S or C Corp? Or if you’re planning on switching to an S Corp like we normally recommend for maximum tax advantages?
Well, it turns out there is a workaround.
As one high-profile tax strategist says: in order to lower your tax, just change the facts.
Here’s how to do it:
The Payroll Tax Workaround to Hire Your Kids
If your business is set up as an S or a C corporation, or as a partnership with other non-parent partners, the IRS says you have to withhold payroll taxes when employing your kids.
But there is a way to get around this restriction utilizing a little creativity and a “hybrid” approach.
Instead of paying your children directly from your S Corp, you pay them out of a family management company.
You can create this simple family management company as a Sole Proprietorship separate from your S Corp, and owned by yourself or your spouse.
Its only purpose is to support the operations of your Corporation, which can include the scheduling and monitoring of jobs done by your child(ren) — and all the bookkeeping and documentation necessary to keep the jobs within IRS standards.
The family management company charges the Corporation a management fee for these services and can then pay your child — which removes them from your corporate payroll.
And since the family management company is a Sole Proprietorship owned by a parent, you, or your spouse, it falls under the IRS exemption where payroll taxes don’t have to be withheld.
By following this workaround, you’ve found a way to truly pay your kids $12,000 per year tax-free using nothing but the IRS’s own rules.
For more tax-saving tips check out how my blog on Tax Deductions VS Tax Credits! Then put on your HR hat, because you've got some little new hires to train!
The richest Americans pay less tax via paid overall a lower tax rate than average due to what the IRS shows they do differently.
The ultra-rich save the most tax, according to IRS statistics. And over 90% of them have one thing in common. They do not sign their own returns. They hire tax pros instead. It shows they paid at a combined 24% rate on average, down 1% compared to the 25% national average.
The more money you make, the more complicated the returns. But it also means the more money you have for tax planning, to pay someone to navigate the complex tax system. They find ways to legally avoid paying tax.
Most less wealthy Americans don't pay for tax planning. Thus they miss out on the various ways of legally avoiding paying taxes. Tax avoidance is finding ways within the law to keep taxation at its smallest amount. That, after all, is what the paid professionals are there to do.
Here’s what you need to know.
What Tax Planning Really Does
Tax planning is the art of arranging your affairs in ways that postpone or avoid taxes as allowed through the ever-changing tax regulations. By employing effective tax planning strategies, you can have more money to save and invest or more money to spend.
Put another way, tax planning means deferring and flat out avoiding taxes by taking advantage of beneficial tax-law provisions, increasing and accelerating tax deductions and tax credits, and generally making maximum use of all applicable breaks available under our fabulous IRS Code.
While the federal income tax rules are now more complicated than ever, the benefits of good tax planning to pay less tax are arguably more valuable than ever before.
BOOK YOUR NO-COST NO-OBLIGATION APPOINTMENT HERE TO SCHEDULE A CONFIDENTIAL VIRTUAL MEETING FROM THE COMFORT OF YOUR HOME OR OFFICE!
You might ask yourself if you can afford Tax planning, but the real question is - Can you afford not to plan and pay less tax?
Would you rather have financial luck or be good with money? Most financial challenges aren't just because of unfortunate events. They 're usually founded on poor financial habits. Some may call it financial luck, but most money challenges can be dealt with with using effective habits. Even a minor unforeseen cost can be crippling, with unsuitable financial practices.
While there are many negative financial habits that one might be guilty of committing, there are a couple that are particularly damaging.
Be careful not to acquire those poor financial habits:
- A failure to keep saving money. Consistently free from financial challenges, people have a consistent saving habit. There's always money to handle the inevitable financial emergencies if you save a portion of your paycheck every time you get paid.
- Make yourself a guarantee that you'll save a certain amount of each paycheck.
- Over-spending. The more you invest, the less you need to save. That is so plain. Over-spending leaves you vulnerable and more likely to face financial difficulties. Very excessive spending results in debt accumulation which is the ultimate financial curse.
- Look for other opportunities to have fun other than wasting money that you just don't need to spend.
- Set a tough cap on how much you can spend per month.
- Credit card overuse and other forms of debt. Debt poses a huge challenge to financial safety and stability. Debt can be cumbersome to eliminate and most debt comes with costly terms that make debt a particularly expensive way to spend money.
- Guard against debt. If you have to use debt to buy something, particularly something that is not necessary, then it's a safe bet you can't afford.
- Ignore the bills. No one enjoys paying bills. Period. Bills, though, have a tendency to pile up and have to be paid eventually. You're also wasting money during the time that should go toward your bills. That is an incredible error.
- Every week, spend a few minutes paying your bills. Make it a ritual that you execute one day a week.
- Charge fines, fees, and over-interest daily. Knew that credit card companies earn more revenue from late fees than they earn from interest? The penalties for ATMs are high. These interest-free loans have enormous interest penalties unless you pay them off on time.
- Pay the bills in due time. Using ATMs that do not claim a fee.
For information on tax debt relief go here!
- Raiding your savings, retirement and investment accounts. There may be times when you might be justified to dip into your savings or other accounts, just be sure it's for a good reason.
- Cashing out part of your 401(k) for a trip to Disney World is not a good reason for that. Wiping out your savings for a vintage car is probably not even a smart idea.
- Retirement accounts are used to invest. Investment and retirement plans are built to invest and create wealth. When you take money out of them they don't work well.
- No budget. And no budget. We just need a budget. Just one billionaire will have to have a budget. Financial limits are set in budgets, and financial limits help avoid financial problems.
- Too much dining out. Is difficult to eat out. Even fast food is more costly than a homemade meal. Homemade meals often prove to be safer.
Were you guilty of any of those attitudes?
Think of someone you know who does have a good career but who appears to be struggling financially. Count how many of the negative habits that person commits is guilty of. Then imagine someone you know, who never seems to be financially struggling. So many of these horrible habits have they?
The findings will come as no surprise!
Positive habits result in positive outcomes. Make sure your financial activities take you to a position you want to be in.