Tax benefits (and pitfalls) of hiring your minor children as a small business owner
School breaks present an opportune time to involve minor children in your small business. As long as they perform legitimate work for your enterprise, hiring your child allows you to pay them up to $12,000 annually tax-free, while also claiming a business deduction for these expenses. However, there are additional tax considerations to be aware of:
- Sole Proprietorship or Partnership (where each partner is a parent of the child):
- Payments for a child’s services are subject to income tax withholding regardless of age.
- Payments for services of a child under age 18 are exempt from social security and Medicare taxes. If the child is 18 or older, these payments are subject to social security and Medicare taxes.
- Payments for services of a child under age 21 are not subject to Federal Unemployment Tax Act (FUTA) tax. If the child is 21 or older, FUTA taxes apply.
- Corporation, Partnership (where not all partners are parents of the child), or Estate:
- Payments for a child’s services are subject to income tax withholding, social security taxes, Medicare taxes, and FUTA taxes regardless of age.
These guidelines ensure you comply with tax regulations when employing your child in your business, depending on the type of business entity you operate. If you’re considering hiring your minor child for legitimate work in your small business, please contact your ShindelRock tax professional.