The Tax Advantages of Hiring a Minor Child

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Hiring your children makes tax sense.
Hiring your children makes tax sense.

Child labor laws prohibit hiring children under 16 for many jobs, but the rules don't apply if you hire your own children to work in the family business. Keep it all in the family by employing your children to help around the office or job site. Hiring your minor children to work for you offers tax benefits and allows your children to gain work experience and learn new skills in a safe, supervised environment.

  1. Withholding

    • While the law requires you to withhold income tax and Social Security taxes from your employees' paychecks and to pay the employer's half of Social Security taxes, these rules don't apply when the employee is your minor child. This saves you money and hassle. Until your child turns 18, you save not only Social Security taxes, but unemployment taxes, which you aren't required to pay for employees who are also relatives.

    Deductions

    • As a sole proprietor or an LLC in which you and your spouse are the only principals, you can deduct the wages you pay your children as a business expense. Provided your children don't earn more than $5,700, as of 2011, they won't have to pay taxes on their earnings. If you have more than one child, you could deduct up to $5,700 in wages for each child employee. You can have your child bank this money to help pay for future education expenses. If your child opens a Roth IRA, he can use the money for education with no penalty when the time comes; if he decides not to use the money for college, he'll have a head start on retirement savings.

    Reasonableness Test

    • The IRS requires that the work you hire your child to perform be reasonable and necessary to the business. If you could reasonably be expected to hire someone to do the job, you can legally hire your child. The wages you pay your child should also be reasonable for the tasks performed and in line with what others in your industry pay for similar tasks. Examples of jobs your child might perform for your business include filing and other office tasks, designing and maintaining a website or handling social media, helping with mailing, or running errands.

    Records

    • Have your child keep a time sheet. Note the tasks she performs and keep records of each paycheck. If you're audited, be prepared to show that the money you paid your child was reasonable for the work she performed, comparable to what you would have had to pay someone else to do the work.

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