Tax-Smart Strategies: Hiring Your Kids in the Family Business This Summer

Summer break is approaching, and for many business owners, it's the perfect opportunity to involve family in the business. As a professional tax preparer serving the Newport Beach area, I often advise clients on the potential tax advantages and compliance considerations when hiring their children for seasonal or part-time roles. Leveraging these opportunities can lead to meaningful tax savings and offer your children valuable work experience.

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Understanding the Tax Benefits of Hiring Your Child

When your child is legitimately employed in your family business, and their compensation is commensurate with the services provided, you can deduct their wages as a business expense. This effectively shifts income from a higher tax bracket (the parents or business owners) to potentially a lower bracket (the child), resulting in overall tax savings for the family. If the child’s total earnings remain below the standard deduction ($13,850 for 2023), they may not owe federal income tax on this income.

Payroll Tax Exemptions for Sole Proprietorships

One significant advantage for unincorporated businesses (like sole proprietorships or partnerships where both partners are the parents): children under age 18 hired by their parents are not subject to Social Security and Medicare (FICA) taxes. They may also be exempt from Federal Unemployment Tax (FUTA) up to age 21—an opportunity to reduce payroll tax obligations while compensating your child for meaningful work.

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Compliance: What You Need to Know

  • Reasonableness: Ensure the tasks assigned are appropriate for their age and ability. Compensation must be reasonable for the work performed.
  • Documentation: Maintain accurate records, including time sheets and job descriptions. Pay your child as you would any other employee — via check or direct deposit — and issue a W-2 at year-end if required.
  • Retirement Planning: Your child’s wages can qualify for IRA contributions (including a Roth IRA), jump-starting their retirement savings early.
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Educational and Life Benefits

Beyond tax advantages, hiring your child exposes them to real-world business operations, fosters a strong work ethic, and encourages financial literacy. They gain valuable skills and experience while contributing to the growth of your enterprise.

Consult a Professional

Each situation is unique, and regulatory nuances must be considered. At Haley Claypool & Associates, we’re dedicated to helping Newport Beach families structure their businesses to maximize tax efficiency and compliance. Contact Haley Claypool, Owner and Tax Preparer, at 818-338-8700 or wendy.claypool@ipersyst.com for personalized guidance on employing children in your family business and optimizing your tax planning strategy.

Haley Claypool & Associates | 2549 Eastbluff Drive #448, Newport Beach, CA 91406

Have Questions?
Let's talk. We are here to help!
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