When you run a small business, you often look for almost any tax deduction that you can take off your bottom line that has a legitimacy when it comes to filing your taxes. For most business owners, there is always a blurred line between your personal life and your business life. Often, your children end up getting involved whether it comes to running errands, filing papers, or even assisting with your company Facebook page. So, the big question is when can your hire your children in the family business and how do you document this when it comes to filing your taxes?
I truly believe that one of the most underutilized tax deductions for small business owners is getting their children engaged in the family business. By placing children (or even grandchildren) on the payroll who are under the age of 18, you can create a great opportunity to take advantage of something called income shifting. Your company can hire each child for $6,300 this year in 2015, and in the majority of the cases neither you nor your household will pay federal taxes on these wages. You will have to deal with paying social security and Medicare tax, but the federal tax savings should outweigh that cost in the majority of small business owner cases.
When you pay your children who are under the age of 18, it cannot be considered a ‘sham’ transaction. My advice is to set up an employee file just as you would for any other employee in your business and write out a one page job description which would be really smart for documentation purposes. Remember, that you can pay your child market rate wages and this can work well for a summer job or after school job depending on their overall situation. Since they will get a standard deduction for the $6,300 of income, they (and you) will essentially pay no federal income taxes because you’ll get a deduction off the business and they will use up their standard deduction. You can pay them via payroll just like any other employee in the business. Consider this for a moment . . . is your child better at Instagram, Facebook, and social media than you are currently? What would you have to pay an outside firm to get monthly help on those platforms?
Once you pay the child, you can use the ‘net’ proceeds for a number of different ideas. You could just save the money in an account for college education, but you should be wary about how this will affect future FAFSA (Free Application for Federal Student Aid) forms. You could also now set up a Traditional IRA or Roth IRA since we all know Social Security may or may not be there for our kids. Last, you could use this as an “allowance” so they don’t keep hitting you up for movie, dining out, or technology costs.
Generally, fourteen is the minimum age of employment underneath the Fair Labor Standards Act. However, there are some blanket exemptions to the FLSA allowing those under 14 years of age to work. You should take a closer look into these if you want your 11 or 12 year old to work, and consider that there are children around the world getting Microsoft certified at even the age of 10.
As you are planning your family finances, hiring kids in the business should certainly be a discussion you entertain no matter how large or small the business is currently. Maybe it is time you consider putting those kids to work!