New Venture Lab: Equipping Christian Entrepreneurs

Question

What are the tax advantages of hiring my own children and how does that work?

Answer

There are numerous benefits to employing your children, depending upon your business structure:

• A parent employing a child under the age of 18 in a family business (sole proprietorship or family partnership (both parents only)) can pay a child up to $5,000 per year, can still claim the child as a dependent and does not have to pay any federal income taxes, social security taxes, Medicare or unemployment taxes. (FICA = 15.3%). 
• If the child is between the ages of 18 to 21, they are still not subject to unemployment taxes or workers compensation taxes.
• If a child earns more than $3,200 per year, they must be a qualifying child in order to be a dependent (long list of qualifications).
• Strategy: pay children salaries.
• Spouses are not subject to unemployment taxes, but they are subject to the other taxes. 

Requirements:

1) Sole proprietorship or family partnership
2) Child must actually perform work
3) The pay must be at market rates

Recommended:

1) Pay on a consistent and regular basis (like a typical payroll)
2) Keep good records
3) Issue a W-2 at the end of the year (again like a typical payroll process)

Other benefits:

1) You can depreciate your home office and write off a portion of the utilities and other home expenses
2) You can depreciate your automobile

Labor laws are very friendly within a family: You can employ your children at any age for as many hours as you want, except for certain dangerous jobs (mining, coal mining, explosives, logging, saw milling, drilling, saws, excavation operations)