There are plenty of reasons for parents to want their children to get a job at a young age. It can help develop a strong work ethic during important developmental years, enable them to learn about the value of money, and teach them about business and entrepreneurship. Thanks to the Tax Cuts and Jobs Act there is now one more reason to push your kids to get a job working for your family-owned business. If you operate your business as a sole proprietorship, single member LLC, or a partnership where the only partners are the child’s parents then it could be beneficial to look into hiring your under-age-18 child.
To be fair, this was never a bad idea, but it is now a better idea than it has ever been before. The TCJA has made it so the first $12,000 your child earns will be exempt from Social Security tax, Medicare tax, and federal unemployment tax. On top of that, the standard deduction has doubled under the new reform to $12,700 which means that your child will get to save even more in taxes. For your child, he will save on taxes that would’ve cut into his wages if he didn’t work for the family business. For your company, the deduction will help save on your federal income tax bill and possibly your self-employment tax bill and/or your state income tax bill.
Corporations and Non-parent Partnerships
Now saving on taxes is all well and good, but what about those that have their small businesses set up as a Corporation, or a partnership with a non-parent partner. Well, if you are willing to work around the rules a little bit (in a completely legal manner) then you could investigate setting up a family management company. The purpose of the family management company would be to schedule and monitor the jobs done by your children. So long as this company is set up as a sole proprietorship and is owned by either you or your spouse then the family management company can simply charge the corporation for the services done by your children. After that, your child should be paid directly by the family management company and this will allow the entire deduction to be tax free for your children.
If you do decide to go down this route it is important to make sure that everything is done correctly in case the IRS comes knocking. The family management company must actually perform the tasks of scheduling and documenting the children’s work, and everything should be set up and looked over by a tax professional. So long as everything is done properly you should have no trouble using this work around to take advantage of the tax laws that have been put in place.
Conclusion
Hiring your children can be a tax smart way to save money for family owned businesses and can even be taken advantage of by most corporations if you are willing to do a little extra work. It is important to note that a child’s wages must be reasonable for the work that they are performing and that hiring kids usually works best with teenagers instead of younger children so that they can do more meaningful work. Now that you have learned about some advantages of hiring your children, all you have to do is make sure to keep all the same records you would for any other employee and begin to reap the savings.
