Hiring your child in your business can be surprisingly powerful, both for your taxes and for building financial skills early. I have seen business owners overlook this, only to realize later how much it could have saved them
1. Tax Benefits
One of the primary advantages of hiring your child is the tax savings:
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Their salary is a deductible business expense, reducing your taxable income.
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If their wages are below the standard deduction, they owe no federal income tax. In 2023, the standard deduction for a single filer is $13,750, meaning they can earn up to this amount tax-free.
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If you’re in a higher tax bracket, shifting income to your child (who is likely in a lower tax bracket) can lower your overall tax liability.
Paying wages to your child shifts income from your higher tax bracket to their lower or zero bracket. That alone can reduce your family’s overall tax liability.
Example:
If you are in the 32% tax bracket, but your child falls under the 10% tax bracket, paying them $23,750 can shift $20,000 of your income, reducing your tax liability by $2,200:
$10,000 x (32% - 10%) = $2,200 in savings
Additionally, if your child is under 18, you won’t owe payroll taxes on their wages. This applies if your business is a:
✔ Sole proprietorship
✔ Partnership (where both partners are parents)
✔ Single-member LLC
Example: Paying your child $13,800 in 2023 saves $1,056 in payroll taxes ($13,800 x 7.65%).
2. IRA Contributions
When your child earns income, they become eligible to contribute to an IRA.
✔ They can contribute up to $6,500 (or their total earned income, whichever is lower).
✔ There are two IRA options:
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Traditional IRA: Taxes are deferred until retirement withdrawals.
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Roth IRA: Contributions are taxed now, but withdrawals in retirement are tax-free.
Since most children fall in the 0% tax bracket, a Roth IRA is usually the better option because their earnings can grow tax-free for decades.
3. Working Condition Fringe Benefits
A working condition fringe benefit is a tax-free benefit provided to employees to help them perform their job. These benefits include:
✅ Company-provided cell phones or laptops
✅ Tools and equipment for the job
✅ Work-related training and education
✅ Job-related travel reimbursements
Since the IRS considers these benefits necessary for employment, they aren't taxable to the employee and are deductible for your business.
Example: Hiring Your Child & Covering Educational Costs
If you own an HVAC business and hire your daughter as a bookkeeper, you can pay for her accounting tuition—as long as the education is reasonable and necessary for her job.
4. Important Considerations & Compliance
While hiring your child can lead to tax savings, it’s important to follow legal and IRS guidelines:
✔ Ensure your child is a legitimate employee.
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They must perform real job duties for the business.
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Their compensation must be reasonable (similar to what you'd pay a non-family member).
✔ Maintain accurate records.
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Keep track of hours worked, job responsibilities, compensation, and benefits provided.
✔ Follow labor laws.
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Pay at least minimum wage.
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Pay overtime for hours over 40 per week.
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Comply with child labor laws regarding job types and hours worked.
✔ Consult a tax professional.
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While hiring your child can save you money, IRS regulations apply.
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A tax professional can ensure compliance and help you maximize your savings.
Optimize Your Taxes with Arnold CPA
Hiring your child or grandchild can be a strategic financial decision, benefiting both your family and your business.
🔹 Need Houston tax expert guidance on tax strategies and IRS compliance?
🔹 Want to maximize deductions while staying within legal guidelines?
Contact Arnold CPA today!
