The Tax Implications of Hiring Your Children

By QuickBooks

2 min read

If your kids want to earn some extra cash this summer, and you need extra help for your business, you might want to hire them. Under the right circumstances, it can be a great tax-saving strategy for the whole family. Here are the tax issues to keep in mind if you’re thinking of hiring your kids during their time off from school.

Payroll and Unemployment Taxes

If your children are under 18 and you’re a sole proprietor or single-member LLC, or run a spousal partnership, your children won’t have to pay Social Security or Medicare taxes if they work for you. And as long as they’re under 21, the IRS doesn’t require that you pay unemployment taxes on their behalf, either. The employer and employee portion of payroll taxes add up to 15.7 percent for 2015 and unemployment is another 6 percent. If your children qualify, together you can avoid paying almost 22 percent of their wages as tax.

Tax Brackets

Even if your children don’t qualify for the favorable payroll and unemployment tax treatment described above, hiring them may still work in your family’s favor. Wages you pay your children are a tax-deductible business expense, which lowers your company’s net income and your total tax liability. Most likely, your kids are in a lower tax bracket than you. If their income doesn’t exceed the standard deduction, it’s possible they won’t owe any income tax on their wages at all. Depending on your tax bracket, you could save up to 39.6 percent on wages paid.

IRS Scrutiny

The tax benefits for hiring your kids can be substantial, which means there’s lots of potential for abuse. There’s nothing wrong with employing your kids, but you may face additional scrutiny from the IRS if you do. Attorney Stephen Fishman recommends that you maintain payroll documentation and records to prove that your children are bona fide employees. Be realistic about your their skills and compensation as well. The IRS isn’t likely to believe that a 14-year-old is doing your accounting, and it will keep an eye out for an unreasonably high pay rate.

Dependent Kids May Have to File Tax Returns

If your children are still dependents and their earned income exceeds the standard deduction of $6,300 for 2015, they’ll have to file their own income tax returns. Even if they aren’t required to file, they’ll want to file anyway if they elected to have federal or state taxes withheld from their paycheck. If you as the employer withheld taxes, a tax refund is the only way to collect any tax refund owed to them.

The amount of taxes you have to withhold from your child’s paycheck is determined by their worksheet on Form W-4. Luckily, children that didn’t have a tax liability last year and don’t expect to have one this year — as in, they expect to earn less than $6,300 — can choose to have no tax withheld by writing “Exempt” in box 7.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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