If you own a business and have children, hiring them could provide you with valuable tax advantages, as long as you comply with all relevant regulations. By employing your kids, you can deduct their wages as business expenses and even set up tax-free retirement accounts for them, even if they are minors.
Key Points on Tax Benefits When Hiring Your Kids
As schools close for summer, many young people enter the workforce. According to data from the Bureau of Labor Statistics, 55% of individuals aged 16 to 24 were employed during the 2023 summer break. A similar trend is expected this year, presenting an opportunity for you to hire your children and benefit from additional tax savings. However, it’s crucial to understand both state and federal labor laws and tax regulations before doing so.
State labor codes are especially important when hiring younger employees, with many states prohibiting employment of children under 14. The work your child does must fulfill legitimate business needs, and their salary should be reasonable. Your child must also be listed on the payroll, just like any other employee. Since labor laws vary by state, consulting a local financial expert before hiring your children is advisable.
What Benefits Can You and Your Child Expect?
For 2024, the federal standard deduction for single filers is $14,600. Since a summer job for your child—lasting two or three months—is unlikely to exceed this amount, they likely won’t owe any income taxes. Meanwhile, the wages you pay them can be deducted as a business expense, offering significant savings for your business. Additionally, wages paid to a child under 18 are exempt from Social Security and Medicare taxes, and payments for services rendered by a child under 21 are not subject to the Federal Unemployment Tax Act (FUTA) tax.
Note that some benefits may differ depending on the business structure, whether it’s a sole proprietorship, corporation, partnership, or estate. For more detailed information, you can refer to the IRS website.
Another advantage of hiring your child is the ability to open a Roth Individual Retirement Account (IRA) for them, allowing them to start saving for retirement early. You can also contribute up to $7,000 annually to their Roth IRA to further boost their savings.
Beyond the financial perks, hiring your child gives you the chance to spend more time together, creating both personal and economic benefits. Don’t miss out on this opportunity to gain from these advantages.