Updated: Dec 3, 2021
In case you haven’t considered it, hiring your children may be the easiest and legitimate way to cut your taxes. In this article, I am going to explore how you can begin to take advantage of the Tax Cuts and Jobs Act (TCJA) in developing a solid tax strategy for your business while cultivating the entrepreneurship culture in your children.
Millennials are often regarded as the generation of entitled individuals. They arrive into the corporate world with no entrepreneurship trait and are often lacking in basic business skillset like money management, workplace culture, and the understanding of tax laws. Instead of having your children leave your home without the basic understanding of the business world, you can engage them in a meaningful and legitimate employment in your business, while minimizing cost and taxes.
If you hire your children as legitimate employees you can deduct their salaries from your business (sole proprietorship or partnership (LLC)) income as a business expense. In addition, if your children are below the age of 18, you won’t have to pay or withhold their any FICA (Social Security or Medicare) tax on the salary. These new rules allow you to shift part of your business income from your own tax bracket to your child’s bracket—which will be lower than your bracket and lead to more savings.
For 2018 and beyond, the Tax Cuts and Jobs Act provides a standard deduction amount of $12,000 per year. This implies that if your child will only have to pay on the salary you pay him or her when his or her salary exceeds $12,000 (that is $1,000 per month). This means your child can earn up to $12,000 per year and not have to pay any taxes.
Indeed, these new rules are good news for parents who run sole proprietorship or partnership business. And, as with all rules, there are conditions.
Your child must be a real employee
You cannot activate this Tax Cuts and Jobs Act (TCJA) if your child is not a legitimate employee of your company. Here are a few ways to make their services legitimate:
Their work must be necessary and beneficial to your business
Their compensation plan must correspond to the actual work performed. Find out what the average salary for the position in your firm or industry, and pay them.
According to the IRS, a child younger than seven cannot perform any useful work for your business. (But, ask Tax Pro Ilona Dovidaitiene E.A. about the job opportunity for your child under age 7)
Compliance with the legal requirements for employees
Once they are hired, they must fill out IRS Form W-4 and complete the Employment Eligibility Verification (USCIS Form I-9). In addition, you must apply and record their Social Security Number (SSN) as well as their Employer Identification Number (EIN).
Indeed, by utilizing this strategy in your business, you will be able to save thousands of dollars in taxes. In addition, you will be building a family that is industrious in the process.