We often get asked what our favorite tax planning strategies are. Right up near the top of the list is employing your kids in your business.

The IRS has a carve out for parents to put their kids to work in their business to the tune of $12,950 per child, tax free!

What is the catch?

  • The kids actually need to be working in your business. Have them stuff envelopes, write posts for your social media, hand out flyers, data entry, etc.
  • You have to pay them a reasonable rate. Sorry, but little kiddo isn’t worth $50/hr. to lick envelopes. Pay them the same rate that you would if you were to outsource the work to Joe off the street.
  • For the plan to be entirely tax free, the wage needs to come from a sole proprietorship. If you are operating as an S Corporation, no worries! You would then create a family management company that would be essentially serve as a contractor from your business that in turn pays the kids. So long as the kids are under 18, there are no FICA taxes that need to be withheld from pay and no income tax will be due if they stay under the standard deduction amount ($12,950).

How does it work?

Simple. Put little Tommy and Susie to work stuffing envelopes and handing out flyers for your business. Pay them (up to) $12,950 and put the money into an account that they are on signers on. Violà! Your business takes the expense deduction AND your businesses taxable income is reduced. Little Tommy and Susie will also have a little bit of spending money that can be used for anything like their back-to-school clothes and supplies, or their first car, the latest iPhone, you get the idea…