Can You Hire Your Kids for Up to $12K and Save on Taxes: Everything You Need to Know

Introduction

Many small business owners wonder if they can hire their own children and save on taxes. The answer is yes, but it involves several key considerations. In this article, we will explore the ins and outs of hiring minors for up to $12,000 in a business and how it can impact your tax savings.

Payroll vs. 1099-NEC: Understanding the Differences

When hiring your child's services, you have two main options: issuing them a W-2 or a 1099-NEC. Each has its own tax implications and requirements.

W-2 Employment

Hiring your child as an employee (W-2) provides a more significant tax benefit. Business payroll expenses are deductible on a business return, which means the child's wages can lower your business's taxable income and, ultimately, your overall tax liability. However, this requires some care in documentation and compliance. According to the IRS, you need to:

Issue a W-2 to the child Withhold and pay the appropriate payroll and income taxes Pay into various payroll and income taxes and possibly workers’ compensation insurance

1099-NEC: Independent Contractor

If you hire your child as an independent contractor (1099-NEC), they will pay more taxes. This is because the child will pay self-employment taxes (15.3%) plus whatever marginal tax bracket they fall into. In this scenario, you don't issue a W-2 and generally, the child is responsible for their own tax obligations.

Proving the Value of Work Done

To legitimately save on taxes by hiring your child, the work they do must be genuine and of real value to the business. This means your child must:

Perform actual work that is worth $12,000 in the general marketplace Provide a detailed record of the hours and type of work they do

For example, if you hire your child to do office work, you should document the work they do and ensure it is substantiated. This documentation is crucial in proving that the payments are legitimate and not simply a guise for tax savings.

Rights and Exemptions of Minors

Minors, particularly those still in school, have some tax exemptions:

They are exempt from paying Social Security and Medicare taxes. They can claim the standard deduction of up to $12,950, which means any income earned up to this amount will not be taxed. If the minor's income does not exceed their standard deduction, they may be exempt from federal income tax.

However, it is crucial to follow the correct procedures to avoid potential issues with the IRS. Misrepresenting or misusing your child for tax savings could lead to severe penalties.

Real-World Scenario: Case Study

A client of mine, for example, realized significant tax savings by hiring his three teenage daughters to do office work. He paid them a fair wage for their work, documented the hours and tasks, and issued them W-2s. As a result, these expenses were deductible, reducing his overall tax liability. This scenario demonstrates that it is possible to save on taxes by hiring your children, provided the hiring is done correctly.

Conclusion

While it is possible to hire your children for up to $12,000 in a business and save on taxes, it is essential to approach this strategically. Legitimate work, proper documentation, and adherence to tax regulations are crucial. If you decide to go down this path, ensure you fully understand the requirements to avoid any legal or financial issues.