If you run your own business (Sole Proprietor-Schedule C,) hiring your child can be a tax savings tool.
Here are some items to consider:
- If you hire your child as an employee, you may deduct their salary from your business income as a business expense. If your child is under 18, you won’t have to withhold or pay any FICA (Social Security and Medicare) tax on the salary.
- In 2024, you can pay your child up to $14,600 and they will not owe any federal taxes on the income. In the state of MA in 2024, you can pay your child up to $8000 and they will not owe state taxes on the income.
- Beware, if the IRS concludes that your child isn’t a real employee, you’ll lose the tax benefits. To avoid this situation, you should follow these rules:
- The child should be at least seven years old. “The IRS has accepted that a seven-year-old child may be an employee.”
- The child must be an actual employee. Their services don’t have to be indispensable, they should be applicable for your business. Any real work for your business can qualify. Their pay should be appropriate for the job and must be for services actually performed.
- The child should complete the same employee forms as all employees, be paid at least monthly, receive a W2 at the end of each year, and their net pay should be deposited in a bank account in your child’s or spouse’s name. Your child’s bank account may be a ROTH IRA, Section 529 college savings plan, or custodial account that you control until your child turns 21.
Interested in getting this setup? Contact Greta Payroll@SchwartzAccountants.com