Kids can help save you taxes

If you have teen children, they are likely busy with school and friends and family. But if you own your own business in the USA, the best thing you can do to save on taxes is to figure out how to employ them either during the summer or year-round.

This is one of those rare triple tax savings strategies, so let’s work through how and why this works.

The 3 tax savings at play are:

1. When children under the age of 18 work for their parents (or grandparents), they pay no FICA (Social Security and Medicare payroll tax) from their paychecks. — Tax Saving #1.

2. With the TCJA tax changes of 2017, the standard deduction for a single person is fairly high at $12,950 (for 2022), so your child can make up to that amount each year and have their taxable income be $0 — Tax Saving #2.

3. You as the business owner get to deduct what you pay your child as the employee as a business expense — Tax Saving #3.

Now you see why this type of triple tax savings are rare in our tax code.

With the tax code explanation out of the way, let’s move on to how to do this.

How to pay your child?

You need to pay your child out of your LLC taxed as a sole proprietor. You can NOT pay your child from an LLC with an S-Corp or C-Corp tax election or an actual C-Corp. You also can’t be a sole proprietor using your own Social Security number with no LLC. If you have an S-Corp, we will cover a workaround in a future article.

If you haven’t already, you should setup an LLC, get an EIN for it, and then setup some basic payroll service (there are many out there that allow minors on payroll) and pay your child a W2 wage. Some tax advisors say a 1099 will work instead of a W2, so depending on your tax advisor, you might get either approach recommended.

How to handle taxes?

Your child will need to file their own 1040 form — they can’t be on yours when they have earned income. The child will take the standard deduction, and FICA exemption, and if their earned income is below the standard deduction amount above, they will pay $0 in taxes. If their income is more the standard deduction amount, then they will pay normal income tax.

What jobs can they do?

This is more specific to your business but see if you can find anything your child is good at or can do and have them try to do it for your business. For example, if you own a landscaping company, have them work with you at customer homes. If you have an office space, have them do filing, shredding, cleaning the office, etc. If your kid is good at social media, have them create content for your company's social media channels. If they are good with computers, have them update Excel files, or scanning, or write software. Obviously, you will need to comply with your state’s child labor laws.

There are lots of creative options — figure out what they can do that your business needs, keep good records on their time spent, what they did and for how long, and pay them a reasonable wage. Minimum wage is fairly high now in some states so paying $15/hr to shred is quite a deal for both the parent and the child! This can take the place of allowance too.

How do I get even more advanced?

That’s for next time — retirement savings!

Hope you found this strategy helpful. Talk to your tax advisor on how to best make this happen for your business and family.

This article is for informational purposes only and should not be construed as investment, tax or legal advice. Always consult a professional advisor for advice specific to your situation before making any major financial decisions.