Wise small business owners don’t simply give their children an allowance for doing chores around the house. Instead, they hire them in their small businesses and give them money in the form of a paycheck.
If you operate a small business and have kids who live with you or near you, it may be worth having them do some work in your company. Often called “income shifting” in business accounting lingo, paying your children comes with many great benefits for both yourself as a small business owner and for them, making this a mutually beneficial situation.
Firstly, there are a few nice tax-saving opportunities you can take advantage of when compensating your kids for work they do. You can pay them a certain monetary amount and then “shift” this income from your business bank account to them at a lower tax rate. In some cases, this income is 100% tax-free. This depends on the structure of your business and how much you actually pay a child. You can do this through a payroll system, and your child can be classified as a regular W-2 employee. You could also choose to classify them as a 1099 independent contractor. Taking these simple steps can help you keep more of the income you generate.
A second perk to paying your children is that it will help teach them about money and what it’s really like to have the responsibility of an actual job. By writing a paycheck to a minor, they can gain the full experience of real-world employment while working under the roof of your small business. This process will give you much more control over their tasks and will give them the peace of mind of working for you rather than an unfamiliar boss. Plus, in order to set up a savings account, you need some sort of income. Remember that it’s never too early to get the ball rolling on this. On another front, the entrepreneurial spirit can be easily sparked in younger individuals, so encourage your kids to think like a successful entrepreneur when doing work for you.
There are a handful of important rules and restrictions to be aware of before bringing your children onboard to your business. To qualify for tax-exempt employment status in your company, your children have to be under 21 in most cases. There is no minimum age on the books, except when a job entails mining, manufacturing, or other forms of labor that pose risks to potential environmental issues. You must also determine the employment status of a child, which plays a role in payroll and IRS tax treatment.
On a final note, there is a maximum standard deduction amount to consider when paying children. This deduction often varies from one year to the next. The general rule is that if the income you pay one of your kids is less than or equal to this amount, that income is 100% tax-exempt. If the amount of income a child receives is over this amount, you may have to pay taxes on it.
Also read the article Tax Implications of Hiring Your Children to Work for Your Business
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