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Employ Your Children and Other Family Members

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Employ Your Children and Other Family Members

 

“Allowance” and other financial aid you extend to your children, grandchildren, or even parents is a deductible business expense if you pay them to perform bona fide work for your business and pay them reasonable compensation for that work.1 Of course, at that point, it isn’t allowance. It’s wages. If you’re hiring your kids, they might even learn not to treat you like “The First National Bank of Mom and Dad”:

Your child can earn up to the standard deduction for single taxpayers ($12,000 for 2018) before they owe tax on their income. The next $9,525 is taxed at just 10%. Earned income isn't subject to the “kiddie tax” for children under 19 (or dependent full-time students under age 24).2 Other family employees pay tax at their regular rate.

The Tax Court approves wages for children as young as 7.

Your family employee’s work should be directly related to your business.

Pay your employee a reasonable wage for their age and the service they perform. Their wages should be similar to amounts paid for similar services by similar businesses under similar circumstances—with adjustments made for their age and experience.

To verify your deduction and audit-proof your return, keep a timesheet showing the dates, hours, and services performed.5 Pay your child by check, and deposit the check in an account in the child's name. This can be a Roth IRA, Section 529 college savings plan, or custodial account. You can’t use custodial assets for your obligations of parental support; however, parental support doesn’t include “extras” like private or parochial school tuition, summer camps, and similar expenses.

If your business is taxed as a proprietorship, you don’t owe Social Security or Medicare taxes on your child’s wages until they reach age 18.6 You don’t owe unemployment tax until they reach age 21.7 The same rule applies if your business is taxed as a partnership and you and your spouse own all partnership interests.

Hiring family members to help work in your business also lets you establish employee benefit programs such as a medical expense reimbursement plan, education assistance plan, and retirement plans.

 

 

 

 

 

 

 

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