Running a small business by yourself can become overwhelming fast, which is where family can come in to pick up any slack. This can take a huge burden off your shoulders, but did you know about all the benefits of hiring your kids? From tax deductions to a strong work ethic instilled at a young age, the benefits of hiring your kids should not go unnoticed.
Requirements For Hiring Your Kids
In order to take full advantage of the tax benefits of hiring your children, you need to be sure you are meeting the applicable requirements. To qualify for tax benefits, your child must actually be performing work that is ordinary and necessary. Additionally, your children need to be old enough to be performing work for you. Hiring your 2-year-old won’t fly with the IRS. Furthermore, your children need to be compensated fairly according to the duties they are performing. An 8-year-old should not be making $75 an hour for filing papers. After keeping all of these requirements in mind and maintaining accurate documentation, you might be able to take advantage of tax savings.
Benefits for You, the Business Owner
As the business owner, the first benefit to hiring your kids is the deduction for wages paid. Paying qualified wages gives way to a business expense that reduces your taxable income. A further reduction of taxes paid occurs if your child is under 18. Children under 18 are not subject to social security and Medicare
tax, which is 7.65% of all wages. If your child is under 21, the wages you pay them are also not subject to FUTA, otherwise known as federal unemployment taxes. However, all kids, regardless of age are subject to applicable federal and state withholding, which should be minimal. Generally, any amount withheld will be refunded when the tax return is filed. Finally, with the cost of labor consistently increasing, hiring your kids can result in lower labor costs all while ensuring your money is going to a good place.
Benefits for Your Kids
Not only can you benefit from hiring your kids, but they can benefit as well. Learning a strong work ethic from a young age can positively impact their work outlook going forward. Who better to learn from than their parents? Money management skills and an entrepreneurship attitude can be established from a young age as well. Moreover, any earned income can be invested in either a 401(k) or other retirement account to start saving early on. Putting money into a Roth 401(k) can save a significant amount of money down the road since the money put in would already be taxed at the child’s lower tax bracket. Young kids don’t generally spend a large amount of money, making it the perfect opportunity to set up a nest egg for retirement.
Going through the process of hiring your kids can be tedious with all the different requirements imposed by the IRS. Hiring a qualified accountant is the first step in staying in compliance and beginning to enjoy the benefits. Abdul Tax Consulting & Accounting Services offers a variety of different services to get you on the right track. From payroll to bookkeeping and filling the tax returns, they’ve got you covered. Reach out today for more information on how to get started paying your children.