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Tax Tip – Children Employed by Parents

Employing your children:

For those of you with teenaged children, you might want to consider whether paying them as an employee might be a valuable as a tax savings tool. There are some caveats that I’ll get to later, but the general idea is that for a business owner in a high tax bracket, paying their children wages can shift some of their income to their child’s (presumably) lower tax bracket. This is a simplified take on the tax situation, but for example:

If you are in the 25% marginal tax bracket, paying your son or daughter $1k in wages will save you $250 (or more if you’re a sole proprietor/partnership). And depending on how much your child makes in total for the year, they may pay no income tax for the year on that money (or at least a lot less than 25%).

And for sole proprietors (not S-corporations or partnerships, unfortunately), children under 18 are also exempt from FICA tax (Social Security and Medicare) and state/federal unemployment taxes.

As promised, a couple of caveats:

  • Your child should actually be doing work, the same as any other employee would do, and for a reasonable salary. Paying your son or daughter $50k/year to answer the phone two hours a week would be frowned upon by the IRS.
  • If they make enough, your child might be required to file a tax return, even if they didn’t have to before. This can be an additional expense.
  • You should treat them as any other employee. Get them to fill out a W-4, keep proper timecards/logs, etc. In the event of an audit, you want it to be clear that you were paying them properly.
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