Need Some Help This Summer? Hire Your Kid And Enjoy A Nice Tax Break
Is your small business getting busy this summer?
Hiring your kid(s) can be the best way to get the help you need while teaching them valuable skills. But that’s not all. You could qualify for some sweet tax benefits from the IRS if you follow their rules.
If this is your first time hiring your child, let’s go through the process of employing your children so you stay compliant!
Why Should You Hire Your Kid?
There are several reasons why bringing your kid on board for your business could be a smart move for both of you:
Tax Savings
You can deduct their wages when you hire your child as a business expense. This will help you reduce your taxable income and help you keep thousands in your pocket.
Let’s use 2024’s federal standard deduction for single filers, which is $14,600. If your child’s income falls within this limit, you can use it as a tax write-off.
They also may be off the hook for taxes, making it a win-win situation.
Roth IRA Contributions
Once your child has earned income, they can start putting money towards their IRA.
A retirement account like this one is a powerful tool for young savers. The IRS typically taxes contributions at a low rate, the investment grows tax-free, and withdrawals during retirement are generally tax-free.
The earlier they learn how to use these tools, the easier it’ll be for your child to save and invest in their future.
Avoiding Certain Taxes
Depending on your child’s age and your business’s structure, they might be exempt from Medicare and Social Security taxes.
If that’s the case, this can add even more savings for your family business. Before anything, though, check with your accountant to see if these exemptions apply.
Rules To Keep In Mind Before Bringing Them On Board
Hiring your child isn’t as easy as paying them cash and doing a simple tax write-off. Here are a few rules and regulations you need to follow to avoid any trouble:
Labor Laws
Different states have varying labor laws regarding the employment of minors. While some may be more relaxed, others, like New York, have specific rules on the types of industries, hours, and dates a child can work. Always research your local labor laws to avoid any legal issues down the line.
IRS Guidelines
The IRS has specific guidelines for employing family members.
Your child needs to be doing legitimate work, and like any other employee, you need to keep track of their hours and what they do. Their compensation must be reasonable for their work to qualify as a tax deduction.
Reasonable Compensation
Their $50 allowance isn’t a wage. The IRS scrutinizes family employment to ensure you pay your kid fairly and wages are within the industry standard.
Paying them too much to too little will lead to more scrutiny, and you might even risk being audited. Always pay your child based on their actions to prevent legal issues and keep your tax benefits.
The Bottom Line
Hiring your kids for your small business can be a win-win situation.
You’ll give them the experience of a lifetime, helping them build a strong work ethic and money management skills from a young age. With practical skills like these being more valuable than ever in today’s workforce, your kid will have the leg up they need to have a successful future.
As for you, you can take advantage of some generous tax benefits and save some money for the next tax season.
Are you ready to bring your child on board? Remember to follow the IRS’s guidelines to maximize your tax break!
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