You can achieve two goals by employing your children in your family business: you provide your offspring with valuable work experience, and you get a few special tax breaks:
- If your business is not a corporation, you do not have to pay Social Security and Medicare taxes. Your business can be a sole proprietorship, an LLC, or a partnership.
- You can deduct your child’s wages as a business expense.
- If your children’s income is below the standard deduction they receive (currently $6,200 in 2014) they do not have to pay taxes on the income.
- You can put some of their earnings aside for a Roth IRA, Section 529 college savings plan, or a custodial account that you control until your child reaches the age of twenty-one.
Remember the following:
- The work your children do must be necessary and essential to your business. They can’t clean the bathroom, for example, but they can file or hand out flyers.
- You must pay them a reasonable salary. You cannot pay them an exorbitant rate just for tax savings. Check to see what employees in your area pay their employees for similar work.
- You must keep good records, give them paychecks like other employees, and keep a record of how their pay was determined.
- You should pay them from your payroll; don’t give them cash.
You must comply with all legal requirements for employers:
- You must fill out a W-4 form and complete the US Citizenship and Immigration Services (USCIS) Form I-9, Employment Eligibility Verification.
- You must record the social security number. If your child doesn’t have one, you must apply for it.
- As the employer, you must have an Employer Identification Number (EIN). If you do not have this number, you can get it by filing IRS Form SS-4.
- Complete and file a W-2 form with the IRS showing how much you paid your child.
Be sure you understand state and federal child labor laws; an accountant can help you with this.