How to Pay Your Child From Your Business

If you want a new strategy to save on taxes, help your child build savings, and leverage long-term investment growth, consider paying your child from your business. If you’re a business owner or self-employed, paying your children from your business has numerous financial benefits. Beyond work ethics for your children, you can capitalize on tax advantages. Read on to learn how to pay your child from your business.

Understanding How Hiring Your Children for Your Business Works

If your child—of any age—works for your business, you could legally pay them from the company. Hiring and paying your kids from your business can be legal and beneficial. As with any other employee or freelancer expenses, paying your kids reduces the total business income and, thus, the tax burden. 

In addition, finding reliable labor at a sustainable price is increasingly difficult for businesses of all sizes. Getting your children involved in the business early can help them understand it as they grow into future roles. 

There are major non-financial and financial benefits, especially for your children, to earning income from the business. Here are a few:

  • It helps teach them the value of work ethics.
  • They get the satisfaction of earning their own income.
  • You can teach them the value of compound interest and saving long-term.

For example, you can open a Roth IRA in your child’s name, or work with your adult child to set up a 401k and start saving for retirement. Putting just $200 a month in the Roth IRA for your child between ages 10 and 20 could equal over $700,000 in retirement savings by the time your child reaches retirement age at 65. That assumes an average return of 7%. 

To legally employ your child, you must meet the following criteria:

  • The pay must be reasonable and not excessive
  • The job must be suitable for children (i.e., not hard manual labor, fieldwork, etc.)
  • You must account for all payments properly
  • The activity and work must comply with all federal and state labor laws

To pay your children with the correct backup information, you must accurately account for and report all payments to the IRS. You can find more on the tax treatment of family members working in the business, or tips to pay your kids tax-free here

How to Pay Your Kids Under Age 18?

According to the IRS, you’ll get additional tax benefits for paying children under age 18. If you’re paying a child under 18, the payments aren’t subject to Social Security or Medicare taxes. In addition, payments for the services of a child under age 21 are not subject to Federal Unemployment Act (FUTA) tax. 

However, payments for services to a child are subject to income tax withholding regardless of the child’s age. In addition, your children, like all other taxpayers, don’t have to pay taxes on the first $13,850 with the standard deduction in 2024. 

If you have a sole proprietorship, LLC, or partnership in which the parents are partners, you can deduct the payments to your children as business expenses and report them on your income tax return. However, you don’t have to pay payroll taxes for your kids if your business is a sole proprietorship, single-member LLC, or LLC owned solely by you and your spouse.

If the business is an S corporation or a C corporation, you must pay payroll taxes for your children. You must also account for these payments in the annual business expenses. However, even with that disadvantage, there’s a key advantage. Putting your child on the payroll diverts income from your higher tax bracket into their lower one. This reduces your taxes, as you’ll get a  business deduction for the wages paid. 

Regardless of the business entity, you can claim the children as dependents if they meet the criteria, even if you pay them. 

How to Pay Your Kids 18 or Older?

If your child is 18 years or older, the IRS has similar rules, with a few key differences. First, if the child is 18 or older, you must pay social security and Medicare taxes on all payments for wages or work for the business. In addition, if the child is 21 years or older, payments for their services are subject to Federal Unemployment Act (FUTA) taxes. You’ll also have to pay payroll taxes for the child over 18 if they are an employee of the business. 

What Are the Benefits of Hiring and Paying Your Children From Your Business?

There are numerous benefits to hiring and paying your children from your business, including:

  • Create a family legacy: By training your children in the business from a young age, they learn the business and gradually can grow into management roles. 
  • Instill work ethics: Teaching children the value and satisfaction of work and dedication can carry them far toward diverse goals throughout their lives. 
  • Tax savings: Your children can earn $13,850 a year tax-free, while you can deduct everything you pay them as a business expense. Learn more about creative tax savings here. 
  • Good labor: Reliable labor is hard to find. By training your children to work in the business, you have employees who may be willing to go above and beyond for the company. 
  • Build savings: Helping your children save some of their earnings in a Roth IRA can lead to long-term wealth building that could set them up for life. 

How Much Can You Pay Your Children From Your Business?

The amount you can pay your child from your business depends on the work they do, their age, and the reasonable payment for that work. Paying your children an excessive salary will raise a red flag with the IRS. 

If you’ve already had an employee in the position you’re hiring your child to perform, you could pay them the same salary. You could ask around and pay them the industry standard for the position. Or, to avoid raising red flags, you could pay your child the minimum wage. 

Setting Up Your Business to Protect Your Children

How to pay your child from your business is simple, business administration should be as well. In addition to paying your child from your business, you could help them launch their own business by establishing an LLC. doola’s fast business formation services make it simple to set up an LLC, get an EIN, open a business bank account, and start building a business. 

Then, to keep up with company management, get doola books to benefit from stress-free bookkeeping designed for busy founders. With doola’s help, you’ll have more time to focus on building your business, and enjoy with your family this year!

FAQs

Do I need to withhold taxes when paying my child from my business?

You will need to withhold income tax as well as Social Security, Medicare, and FUTA taxes for payments made to your child if they are working for a partnership or a corporation. If the child’s parents are the only partners in a partnership, you don’t have to do income tax withholding. 

Can I deduct expenses related to paying my child from my business?

Yes, you can deduct expenses related to paying your child from your business. However, the pay must be reasonable, and the job must be necessary. 

Can I pay my child more than their fair market value for tax purposes?

It’s not a good idea to pay your child more than their fair market value for tax purposes. In fact, that’s a red flag for the IRS. You can only pay the child the fair value (or minimum wage) for a necessary job.  

Do I need to issue a Form W-2 or Form 1099 for my child’s payment?

You can issue a Form W-2 or a Form 1099 for your child. However, most business owners prefer to pay their child with a W-2, as neither you nor the child will have to pay Social Security or Medicare taxes, assuming the child is under 18. 

Can I pay my child in non-monetary forms, such as shares of stock or company assets?

Yes, you can pay your child in non-monetary forms like shares of stock or company assets. However, the IRS may treat this as a gift rather than a payment and it could have different implications for your tax filings.  If in doubt, speak with a certified public accountant (CPA) about the tax implications of non-monetary gifts or payments you plan to make to your child. 

doola's website is for general information purposes only and doesn't provide official law or tax advice. For tax or legal advice we are happy to connect you to a professional in our network! Please see our terms and privacy policy. Thank you and please don't hesitate to reach out with any questions.

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