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It’s summer-time! For most small business owners that means your kids end up logging some time at your workplace. Even if that’s not in your plans, perhaps it should be a part of the summer plans. There are plenty of benefits to engaging your child to work for the family business, but one you may not have considered is that:

Employing your minor child offers some excellent tax advantages.

If your small business hires your children to work in the business, there are significant tax benefits if the children are not yet 18 years of age. You can pay your child for the work done without subjecting them to federal or state income taxes. Plus, in many instances you are not required to withhold Social Security, Medicare or unemployment taxes.

The tax law allows owners to pay their children up to $12,200 in 2019 and if done correctly, all of this amount may be paid tax-free. This creates a tax deduction for you as the business owner and allows you to divert cash flow from your business and into your household in a tax advantaged way.

This approach is one of the fundamental elements of successful tax planning for business owners. Many parents will use the child’s “earnings” to pay for extra-curricular activities, private school tuition, and other expenses that would typically be paid from their after-tax dollars.   This approach allows those expenses to be met using funds that are untaxed.

However, using this tax tip is not as simple as it seems. We highly recommend engaging us to set you up for successes, and partner with a payroll provider to ensure it is managed properly. Further, the law requires the child to be doing age-appropriate work. This means the business cannot hire a 5-year-old to maintain the corporate financial records. Instead the child should be paid based on a practical job relevant to the child’s age.

Contact us if you would like to set up a consult to guide you on how to employ this tax strategy for you and your family.

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