Paying your kids wages through your business can offer tax benefits while teaching them financial responsibility. However, there are specific guidelines and regulations to follow. Below is a concise guide on how to do it correctly.
1. Establish a Legitimate Job
- Create a Job Description: Ensure the job is necessary for your business operations. Roles like office assistant, janitorial tasks, or inventory management can be appropriate.
- Age-Appropriate Tasks: Assign tasks that suit their age and capabilities. Children as young as 7 can perform simple tasks, while teens can handle more complex duties.
2. Set Up Proper Documentation
- Employment Agreement: Draft a contract outlining job duties, hours, and pay rate.
- Timesheets: Maintain accurate records of hours worked by your child.
- Payroll Records: Keep thorough payroll documentation for audit purposes.
3. Pay a Reasonable Wage
- Market Rate: Pay them a fair wage comparable to what you would pay someone else for the same job.
- Minimum Wage Compliance: Ensure compliance with federal and state minimum wage laws.
4. Follow Tax Regulations
- Withholding Taxes: Children under 18 employed in a parent’s business are exempt from social security and Medicare taxes if the business is a sole proprietorship or partnership with both parents as partners.
- W-2 Forms: Issue W-2 forms to your child at the end of the year.
5. Benefits and Deductions
- Tax-Free Income: For 2023, the standard deduction allows a child to earn up to $13,850 without owing federal income tax.
- Business Expense Deduction: Wages paid can be deducted as a business expense, reducing your taxable income.
6. Use Direct Deposit
- Simplify Payments: Use direct deposit to ensure timely and accurate payment.
7. Open a Roth IRA
- Retirement Savings: Consider opening a Roth IRA for your child. Earned income makes them eligible, and this can be a great way to start their retirement savings early. Avoid common retirement planning mistakes by planning ahead.
In Conclusion…
Paying your kids through your business can be a win-win situation if done correctly. Ensure you adhere to all legal requirements and maintain proper documentation.
For more detailed guidance, consult with a tax professional or business advisor, always.
