As summer approaches and school ends, many small business owners consider hiring their children to work within their companies. Beyond providing valuable experience, employing your child can offer significant tax advantages for both your business and your family. Here’s how you can leverage these benefits effectively:

Benefits for Your Child

If your business operates as a sole proprietorship, a partnership owned by both spouses, or certain types of LLCs, you can hire your under-age-18 child as a part- or full-time employee. The wages paid to them are exempt from federal payroll taxes such as Social Security, Medicare, and Federal Unemployment (FUTA) taxes until they turn 21. Additionally, your child can use the standard deduction to shield up to $14,600 of their 2024 wages from federal income tax.

Benefits for Your Business

By hiring your child, you can deduct their wages as a business expense. This deduction reduces your federal income tax, self-employment tax (if applicable), and potentially your state income tax liabilities. It’s a tax-efficient way to allocate income while fostering a sense of responsibility and work ethic in your child.

Traditional and Roth IRAs

Regardless of your business structure, your child can contribute to an IRA or Roth IRA based on their earnings. Roth IRAs, funded with after-tax dollars, offer the advantage of tax-free withdrawals after age 59½, provided the account has been open for at least five years. This makes Roth IRAs particularly attractive for young earners due to their ability to grow tax-free over time.

Considerations

To maximize these benefits, ensure that your child’s wages reflect fair compensation for the work performed. Maintain accurate records including timesheets, job descriptions, and issue W-2 forms as you would for any employee. This documentation is crucial to substantiate their employment in case of an audit.

Conclusion

Hiring your child in your small business not only provides them with valuable skills and work experience but also offers substantial tax benefits for your business. By structuring their employment correctly and utilizing available tax deductions, you can optimize your family’s finances while complying with IRS regulations.

If you have questions or need further guidance on employing your child in your business, don’t hesitate to reach out to us. We’re here to help you navigate the complexities of tax-efficient business practices.

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