Hiring Your Children Can be a Great Tax Savings Tool
I remember when my daughter was young, and she wanted to do EVERYTHING. Every type of sport, dance, camp; we did it. She had a blast! My wallet…. not so much. It only took one year of spending this kind of money when I realized I could take advantage of a great tax strategy just by hiring my daughter to come work in my tax practice.
Hiring your children has always been a great tax savings tool and with the passage of the Tax Cuts and Jobs Act (TCJA), there is even more savings. Your child now can earn up to $12,000 and owe no income tax on that income. However, please keep in mind, with all great tax benefits, the IRS is fully aware of them. To ensure that you do not lose this deduction, if the IRS concludes your children are not true employees, the following steps should be taken.
1. Your child must truly be an employee. The work must be reasonable for their age. The IRS will not believe that a very young child is a legitimate employee. It must be a necessary and ordinary part of your business. You must keep track of their hours. I hired my daughter at the age of 6, to come in and shred documents. She designed her own timecard and we documented when she started and when she stopped. It was a win/win for both of us.
2. Compensation must be reasonable. I could not pay my daughter $100 an hour to shred papers. I researched what someone would get paid for general clerical duties with no experience and paid her based off that. I cut her a paycheck (did not pay her in cash) and the money was deposited into her own checking account.
3. Follow the legal requirements for Employers. Your children must fill out a I-9 Employment Eligibility Verification and a W-4 form. At the end of the year, I prepared a W-2 form for her and filed the necessary tax documents with the IRS.
Hiring your children is one of the benefits of being an entrepreneur. If you would like to learn more tax planning strategies to help you save money on your taxes, please contact us and we can schedule a consult.