If you own a business, hiring your child or grandchild can provide valuable work experience while also offering significant tax savings. Here’s how you can benefit:
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.
Example: Shifting Income to a Lower Tax Bracket
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!
