Tax benefits (and pitfalls) of hiring your minor children as a small business owner
School breaks can be a great time to enlist minor children to work in your small business. As long as they’re doing legitimate work for your business, you can hire your child tax-free and pay each of them up to $12,000 per year tax-free, while also taking a business deduction on the expense. However, there are other tax considerations for them and you. Here’s what else you need to know:
If the business is a parent’s sole proprietorship or a partnership in which each partner is a parent of the child:
- Payments for the services of a child are subject to income tax withholding regardless of age.
- Payments for the services of a child under age 18 are not subject to social security and Medicare taxes. If the child is 18 years or older, then payments for the services of a child are subject to social security and Medicare taxes.
- Payments for the services of a child under age 21 are not subject to Federal Unemployment Act (FUTA) tax. If the child is 21 years or older, then payments for the services of a child are subject to FUTA taxes.
If the business is a corporation, a partnership (unless each partner is a parent of the child), or an estate (even if it is the estate of the deceased parent of the child):
- Payments for services of a child are subject to income tax withholding, social security taxes, Medicare taxes and FUTA taxes regardless of age.
If you’re considering hiring your minor child for legitimate work in your small business, please contact your ShindelRock tax professional.