Should You Employ Your Children? What are the Tax Benefits?

Did you know? If you hire your children as employees to do legitimate work in your business, you may deduct their salaries from your business income as a business expense. This can be a substantial benefit for some as it allows you to shift part of your business income from your tax bracket to your child’s bracket. This can be a win-win situation for both you and your child. Not only does it allow your child to learn the value of work but it also provides them with insight on the family business. And, it’s a great tax deduction for you! You can pay your child under the age of 18 up to $6300 tax-free by taking the standard deduction. That’s money your child will have to spend on a car, college, clothes, gas, etc.

Here are some things you need to know

1. Your child must be a qualified dependent.
2. Pay real wages for real work, paying in pizza and still taking the deduction won’t fly with the IRS.
3. The job must be age appropriate and salary should reasonable match job responsibility.
   Contact us for a list of jobs kids can do in a dental office.
4. Document the job description and employee agreement. To avoid unnecessary scrutiny, maintain proper payroll documentations.
5. Keep a timesheet of hours and day worked. This will help substantiate the amount of money received for work. It is good practice if the child deposits the paycheck in a bank account rather than cashing them as it shows the IRS the child took possession of the funds.
6. Be aware of the tax requirements, payments for the services of a child under age 18 who works for his or her parent in a trade or business are not subject to social security and Medicare taxes if the business is a sole proprietorship or a partnership in which each partner is a parent of the child. However, children who employed by S Corporations or partnerships that include nonparent partners or corporations are not exempt. Also, payments are not subject to federal unemployment tax if the child is under 21.

If your child qualifies, you can avoid paying approximately 22 percent of their wages in tax. Before making the final decision of adding your child to payroll, consult with your CPA as the actual tax savings depends on your tax rate, your child’s rate, and the entity under which the business operates. For more questions on the benefits of employing your child contact us at 844-Dent CPA or visit our main blog page at  www.dentalcpas.com/news-events/.