Children are a blessing, but how quickly they grow up. From that sweet, tiny face that would run to meet you at the door, to the teen that might give you a quick hello before heading back into their room. Kids grow up and spread their wings, and as parents, we still want to influence them, instilling in them good decision-making skills and a strong work ethic. One way for business owners to do so is to gainfully employ your own offspring.
And fortunately, there are tax benefits from hiring your kids, too.
The hiring process
Your 9-year-old who still thinks your lunch box notes are cool might jump at the chance to accompany you to the office. Your 15-year-old may laugh when you propose the idea– until you tell him what he’s capable of earning and that he will be treated like the rest of the professionals on payroll.
You can pay your child age 17 or younger up to a tax free sum of $6,300 per year, saving you $2,079 in taxes in the 33 percent bracket. Conveniently, tax deductions are in the bank just before fall semester tuition is due. Tax benefits from hiring your kids only apply to children younger than 18.
If you pay a child an additional $5,500 per year, either through a pay raise or additional hours, the extra earnings can be deposited into a traditional IRA for your child and will be tax-deductible. This is a great way to teach the importance of saving and to demonstrate that money does more than buy gas and new jeans- you know, the ones that already come with holes.
By the way, business owner, you just saved $3,894.
If tuition costs are on your mind, and if you would like to compensate your child beyond the $11,800 outlined in the two options above, you can set up a section 529 Qualified Tuition Program. Involving children in their future is a brilliant way to teach them about costs and a positive relationship between time and money.
Although these contributions are not deductible, you can still save out of pocket expenses by paying your child versus paying yourself.
When it’s a fit for your business and your family, offering this experience to your child is priceless. You keep your full gift and estate tax exemptions, and your child gains the knowledge of planning and contributing to his or her future at an early age.