Owning your own business gives you an opportunity to write off many of your everyday expenses including money used to take care of your kids! Yes..as long as your expenses relate to running your business, it can be turned into a legitimate business tax deduction.
As an entrepreneur or small business owner, you have the tax advantage of hiring your child in your business (or your children if you have more than one) and you can deduct the wage you pay them on your business tax returns. If your child(ren) are between the ages of 5 and 18 (in some cases up to age 21), you can hire them as a business helper and pay them a wage. Set up a real payroll type of system for paying them where you keep track of their pay dates and their rate of pay etc, along with the number of hours worked and I would also recommend keeping a brief work diary of the tasks they performed. It is not necessary to use a payroll company for this arrangement.
You then have them take their paycheck and deposit into their bank account (even if this is a custodial checking account with your name on the account)…let them deposit their paycheck and use those funds to pay for items like part of their private education, Summer camp, clothing, footwear, transportation to school, lunch money, outings with friends, teen activities, etc. If you are a Sole Proprietorship (a/k/a/ DBA “Doing Business As”) or a single-member LLC or Partnership, you will not be required to withhold social security or Medicare taxes. Also note that they will not be required to file an income tax return as long as you keep them under the “minimum threshold required to file income taxes” (every year this amount changes, so always be sure to check on the IRS website). Allowing your child to use their own money to pay for these sort of expenses, will also teach your child a better set of money skills from a young age including starting and building their savings account and budgeting (which I know far too many of us had wished we learned these skills sooner rather than later).
As an example, for tax year 2016, the minimum income required for a Single taxpayer to file income taxes is $10,350…let’s say you pay your 16 year old a wage for the year of $8,000, your 16 year old will not be required to file a tax return AND you get the huge $8,000 tax deduction on your business tax return. It is always best to operate your business in an audit-proof way so make sure you actually issue your child a W-2 every year and properly file it with the IRS. The beauty of this “hire your kid” smart tax strategy is that you can do this even if you have more than one child.
The rules change slightly if you run a Corporation such as an S-Corp or C-Corp. In this case, you will have to withhold the proper taxes from your child’s pay and even have a Form W-4 on file for your child employee. But your child will still not be required to file an income tax return as long as you keep their wage under the minimum filing requirement. (Please note that this post is only referring to wage earnings you pay your child from your business…in a case where you child has Investment earnings above the Kiddie Tax Threshold, that is a different topic).
If you are looking for more info on choosing the right business entity for you, CLICK HERE to check out my prior blog post on that topic.
Of course “how deep” you want to go into covering all bases is totally up to you but it is perfectly okay if you want to prepare an actual job description to keep on file in your child’s personnel file. Of course this can also be digitally stored if you maintain a paperless office. You can also keep an annual performance review on your child to measure their performance. Imagine the early lessons your child will learn when it comes to work ethics.
Being a small business owner and hiring your own children is just one of the many smart tax strategies I teach my clients. If you are interested in signing up for my Entrepreneur Services, I have short term or long term packages where you get the opportunity to directly communicate with me and receive my guidance, business coaching and mentoring that will help you become a tax savvy entrepreneur (which is the only kind of entrepreneur to be) or learn how to brand and market your business more effectively and take your business to the next level.