In the age of social media influencers, the idea of small businesses hiring their own children for tax benefits has become a popular topic. However, tax professionals warn that many of these posts contain misinformation and lack the necessary nuance to fully understand the rules and regulations surrounding this practice. While there may be a kernel of truth in these viral videos, it is crucial for self-employed individuals to thoroughly understand the implications before hiring their children.
Certified financial planner Sean Lovison emphasizes that hiring your child can indeed be a tax-savvy move for small business owners. By deducting their wages as a business expense, significant savings can be achieved. The federal standard deduction for single filers in 2024 is $14,600, which means that if your child’s income falls within this limit, they may not owe any income tax. This not only benefits the business but also provides a tax advantage for the child.
Once children have earned income, they can make Roth individual retirement account contributions, providing a powerful saving opportunity for younger individuals. This triple-tax benefit allows children to contribute without facing heavy tax burdens, enjoy tax-free growth, and withdraw funds tax-free in retirement. It is a strategy that fosters good financial habits from an early age and sets the foundation for long-term financial security.
Before hiring your children, it is essential to be well-versed in both state and federal labor laws, as well as tax regulations. Some states have strict restrictions on hiring children under a certain age, while the IRS has specific guidelines on payments to children. It is imperative that children are engaged in legitimate work for the business, and their compensation should align with their responsibilities. Additionally, meticulous record-keeping is essential to navigate the tax landscape and address any queries related to the child’s employment.
The tax benefits of hiring your children can be a valuable strategy for small business owners. However, it is crucial to approach this practice with caution and compliance. Understanding the nuances of labor laws and tax regulations is imperative to maximize the benefits while avoiding potential pitfalls. By following the rules, keeping accurate records, and seeking guidance from financial experts, self-employed individuals can leverage this opportunity to create tax advantages for both their business and their children.