Are you considering hiring your child to work for you? Hiring family members can be tricky, but if you do it right, it can be a good thing for them and your business.
As long as you hire your kids to do legitimate work, it can be a great way to save on taxes. You can pay them up to $12,000 per year completely tax-free.
Your child can earn some money and save for college or other future needs. A job can help them establish a good work ethic and get some job experience for their resume.
If you want to know more about hiring and paying your kids, we have the answers! Here’s what you need to know about hiring and paying your kids.
Tax Benefits
You and your child can receive tax benefits when you hire them as an employee of your business. It’s a good idea to consult a tax professional first to maximize your tax savings.
If your child is doing legitimate work, you can deduct their pay from your business income. This process is the same for a non-child employee as well.
The deductions must meet specific criteria. If the child is under 18, you don’t have to pay or withhold FICA taxes on their salary. There are some exceptions to this rule, however.
Child Earnings and Low Taxes
As an employee, your child must pay taxes on their salary if it exceeds the standard deduction for the year. Fortunately, this deduction is large.
For 2022, the standard deduction is $12,950 for single taxpayers. That means your child can earn $12,950 per year or $1,079 per month and owe no income tax.
If you pay them more than this, they will have to pay taxes at the single taxpayer rates.
IRS Rules
If you’re considering hiring your child, make sure you follow the guidelines. The IRS is well aware of the benefits of hiring a child, so they watch out for businesses that take advantage of the situation.
If the IRS investigates and finds that your children aren’t actual employees, you may lose your deductions for their salary and benefits. Your child would have to pay taxes on their benefits.
This is avoidable by simply abiding by the following rules.
Your Child Must Be an Employee
First, your child must be a real employee. That means the work they do is ordinary and necessary for the business.
They don’t have to provide indispensable services, only helpful, acceptable, common, and appropriate work for your particular business. Any real work your child performs qualifies.
You cannot receive tax deductions if your child performs personal services, such as babysitting or doing the dishes at home. If it’s the first job for your child, there are probably many things they could do at your business.
Consider having your child answer phones, clean offices, help with your website, file papers, and more. The IRS won’t consider a very young child as an employee.
They have accepted that a seven-year-old child can be an employee, but they probably wouldn’t accept that a younger child could perform meaningful work.
Be sure to keep track of the hours your child works and the types of work they do. Consider using a spreadsheet or an app to keep track of this.
Although it’s not a legal requirement, it’s a good idea to have your child sign a written employment agreement. This should outline the services they do and hours they will work.
Provide Reasonable Compensation
If you plan to hire your child, it’s a good idea to pay them as much as possible. This way, you can shift some of your income to your kids who are in a lower tax bracket.
You can’t pay your kids whatever amount you choose. The compensation must be reasonable for the services they perform.
Compensation is determined by comparing the amount paid to the value of the services performed. You shouldn’t have any issues if you pay your child equal to what you would pay any other employee performing the same work.
Don’t try to pay your child over the reasonable amount. Take a look at what workers performing similar services in your local area are making.
If you’re unsure, contact a temp agency to find out. To leave a record of payment, pay your child by check or through direct deposit. Do not use cash.
You can place their earnings in an account under your child’s name. This can be a college savings plan, Roth IRA, a custodial account, or other savings plan.
Comply With Employer Requirements
As an employer, you must comply with some of the same hiring requirements as you do when hiring a stranger. You will complete a W-4 form, USCIS I-9 form, and employment eligibility verification.
You must record your child’s social security number. If they don’t have one, you must apply for one.
You must have an Employer Identification Number (EIN). if you need to apply for an EIN, you can do so online at www.IRS.gov or by filing Form SS-4.
You must also file a W-2 form each year, verifying the amount you pay your child.
The Tax Benefits of Hiring Family
Hiring family can lead to favorable tax benefits for your business. Hiring your kids can be rewarding in so many ways.
You get to enjoy being around your kids while saving money on your taxes. They get the benefit of earning their own money while getting valuable on-the-job experience.
At ERC Today, we work with businesses large and small. Our goal is to help every business benefit from the Employee Retention Credit (ERTC) for Covid-19 Relief.
Apply today to take advantage of this tax-saving opportunity.
