A Comprehensive Guide to the Tax Implications of Hiring Your Child in Your Company by Kevin Scott, CPA

Hiring your child as an employee or intern in your company can be a smart business move, not only for their personal and professional growth but also for the potential tax benefits it offers. However, it is crucial to understand the tax implications and follow the proper procedures to ensure compliance with tax laws and regulations. This comprehensive guide will provide you with valuable insights on managing the tax implications of hiring your child.

Eligibility of Hiring Your Child

The IRS allows you to hire your child, regardless of their age, as an employee in your company, as long as the work they perform is legitimate and reasonable for their age. They should be treated like any other employee, with clear job responsibilities and appropriate compensation.

Managing Payroll

To manage your child’s payroll effectively, you need to follow these steps:

1. Obtain an Employer Identification Number (EIN) if you don’t already have one for your business.
2. Complete all necessary employment forms, including Form W-4 (Employee’s Withholding Certificate) and Form I-9 (Employment Eligibility Verification).
3. Keep accurate records of your child’s hours worked, wages, and any applicable deductions or benefits.
4. Calculate and withhold income taxes, Social Security, and Medicare taxes from your child’s wages based on the information provided on the W-4 form.
5. Deposit the withheld taxes and employer’s portion of Social Security and Medicare taxes on time.

Filing Taxes for Your Child Employee 

When it comes to filing taxes for your child employee, here are the two main points to consider:

1. The wages paid to your child shows as wage expense on the business’ income tax return
2. If your child’s adjusted gross income is less than the standard deduction amount (2023 is $13,850), then your child would not have any income tax liability.

Tax Benefits of Hiring Your Child 

Hiring your child can offer several tax benefits, including:

1. Tax deductions for business expenses: You can deduct your child’s wages as a business expense, reducing your taxable income.
2. Lower tax rates for your child: If your child files their own tax return and their income falls within the lower tax brackets, they may benefit from lower tax rates.
3. Contributions to a retirement plan: By employing your child, you can contribute to their retirement account, helping them start saving early and potentially reducing your taxable income.

However, if your child is under 18, they may not have to pay payroll taxes at all if the following is true:

1. The business is a sole-proprietorship, a single-member LLC taxed as a sole-proprietorship, or a partnership (as long as the child is a child of all the owners).  Which means the child’s parents can be the only partners.
2. If the business is an S Corporation, a C Corporation, or an LLC taxed as an S Corporation, the child’s wages are subject to payroll taxes.

Practical Tips for Effective Tax Management 

To effectively manage the tax implications of hiring your child, consider the following tips:

1. Keep accurate records: Maintain detailed records of your child’s employment, including hours worked and wages paid.
2. Pay a reasonable wage: Ensure that the compensation you provide to your child is comparable to what you would pay an unrelated employee for similar work.
3. Consult with a tax professional: Tax laws and regulations can be complex and subject to change. Seeking advice from a qualified tax professional will ensure compliance and help you maximize the available tax benefits.

It’s important to note that tax laws and regulations can vary based on your location and the nature of your business. Therefore, it is advisable to consult with a tax advisor or CPA who can provide personalized guidance tailored to your specific circumstances.

By understanding the eligibility criteria, effectively managing payroll, filing taxes correctly, and leveraging the available tax benefits, you can navigate the tax implications of hiring your child in your company successfully. Remember, staying informed and seeking professional advice are key to ensuring compliance and maximizing the advantages of this business strategy.