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Hiring Your Kids Can Save You a Lot of Money on Taxes.

Hiring Your Kids Can Save You a Lot of Money on Taxes.

Hiring your kids to do legitimate work for you has always been an excellent tax strategy if you own a business. 

Want to know why? When you hire your kids as employees of your business, you can deduct their salary as a business expense. This in itself is beneficial. But it gets better: your child will only have to pay income tax if he exceeds the standard amount of the deduction for the year. TCJA nearly doubled the standard deduction. For the 2019 tax year, it is $12,200 for single taxpayers. This means your child can earn $12,200 in annual employee income and pay no income tax. This is by far the highest amount kids have ever managed to earn a job without taxes.

Example: Joan hires her 16-year-old daughter, Jane, to provide data entry services to her sole proprietorship. She works ten hours a week, and Joan pays her $20 an hour (the current price for this job). In one year, she pays her a total of $12,000. When Joan files her taxes for the year, she can deduct $10,000 of her business income as a business expense. Since Jane's salary is less than the standard deduction, she pays no income tax.

Also, if your child is under 18, you won't be required to withhold or pay any Social Security or Medicare payroll taxes (with some exceptions). In addition, you will not have to withhold income tax from your child's salary unless your professional income exceeds the standard deduction. However, you must withhold income tax if your child has more than $350 in unearned income (for instance, dividend or interest income) and his or her total income exceeds $1,100.


Take advantage of your child's lower tax bracket.

You can pay your kid more than the standard deduction amount, and you can pay taxes in advance. Indeed, your child will likely be in a much lower tax bracket than yours. For example, in 2019, a child is taxed with only 10% of taxable income up to $9,700; taxable income means total income minus the standard deduction. Hence, a child could earn up to $21,900 and only pay 10% income tax on $9,700 of that amount, or $970 tax on $21,900 of income.


Your child must be a real employee.

The IRS is aware of the tax benefits of hiring a child, so it prosecutes taxpayers who claim the benefit without their children working in their business. If the IRS finds that your kids are not employed, you will lose your tax deductions for their wages and benefits.

You just need to hire your child to do real work, which must be real. It can be any type of work as long as it is necessary for your business and your child does it. For example, you can hire your child to clean your office, answer the phone, enter data, or deliver (a child can only deliver on foot or by bike, not by car) a package to a client. You do not receive business deductions when you pay your child for personal services such as babysitting or mowing the lawn at home. On the other hand, the money you pay for landscaping a commercial property may be tax-deductible as a business expense.

You should keep track of your children's work and hours by filling out their timecards or timesheets.

You should also pay your child a reasonable amount for the work done. You shouldn't overpay just because you're saving on taxes. To show how much you paid (and that you paid it), you must pay your child by check or electronic deposit, not cash.

Finally, you must meet most legal requirements when hiring your child as you do when hiring your workers. These include filing tax returns at work. 


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