How to Deduct a Child's Wages as a Business Expense From Taxes

Nepotism in the workplace can be a good thing. If you're looking for home business tax deductions, hiring your child can result in qualified pre-tax deductions. You can deduct your child's wages as a business expense from taxes. In addition, you can also save money by becoming exempt from employer-matched taxes on your son or daughter's payroll.

Difficulty: Moderately Easy

Instructions

1. Verify you have a qualified business. The company can be designated as a sole proprietorship or a partnership owned entirely by you and your spouse. If another investor owns a portion of your business, your child may qualify as an employee but you cannot claim the tax benefits.

2. Know the laws for your child's age. Under the age of 18, you don't have to withhold FICA (Medicare and Social Security) taxes from your child's paychecks or pay the employer-matched amounts. You are also absolved from paying FUTA (and SUTA where applicable) taxes on your child's payroll. However, if your child is between the ages of 18 and 20, only the FUTA (and SUTA where applicable) exemption(s) are available.

3. Put your child on the payroll. Treat your child as you would any employee; with an employee file, payroll records and time sheets. Pay your child with the same frequency you pay all your employees. If you hire your child by the project, keep detailed records explaining the dates and hours involved as well as what service your child performed to earn his or her wages.

4. Bring your payroll records to your business accountant at tax time. Separate your child's wages from those of other employees. Be sure your accountant is aware your child is on the payroll and therefore qualified for pre-tax deductions.

Tips & Warnings

• You may be tempted to bend the rules where your child is concerned. Please remember, as a business you are not exempt from child labor laws. If you hire your minor child as an employee, be sure to follow all labor laws.
• The IRS looks closely at home business tax deductions. Be certain your child is capable of doing the job you describe and the pay is reasonable for services rendered. Claiming you've hired a four year old to do accounting for $30,000.00 a year will get the business (and possibly you personally) audited in a heartbeat.
• If your child is saving for college, think carefully about what wage to offer. Those who award educational scholarships and student loans take the applicant's earnings into consideration. Surpassing the current earnings threshold can decrease benefits by 50 percent or more.