Pay Your Children, Pay Less Taxes

Editor's note: This article was originally published in 2021. Tax rules and the standard deduction amount change every year, so confirm current figures with a tax professional before you set up payroll for your children.

How can your children work for you and give you a tax write-off? Running your own business is as demanding as raising children. You have to nurture it and grow it until it runs without you pushing every day. Doing both at once is another level.

Did you know you can use that to your advantage? You can put your children on payroll and deduct their wages. Current tax rules let you treat reasonable pay to your children as a legitimate, deductible business expense. That lowers the income your business is taxed on.

The rules you must follow

1. The work must be real. Your children must do legitimate work that directly supports the business. There is no minimum age, so make sure the tasks are age-appropriate and follow Department of Labor rules for young workers.

2. The pay must be reasonable. You can't pay your 10-year-old $12,000 for tax work. That would draw scrutiny and could be disallowed. Give your children realistic jobs such as cleaning the office, caring for equipment, simple data entry and errands.

3. Keep records. Document your children's job duties and hours in case the IRS reviews them.

4. Treat them like any other employee. Pay them the same way you pay the rest of your staff. No special treatment strengthens their standing as real employees.

How it works

Every taxpayer gets a standard deduction. When this was written, it was $12,400. If your child's annual pay stays at or below the standard deduction, they generally owe no federal income tax on it, and your business can still deduct the wages as a business expense. It's a way to save for your business and your children's future.

Beyond the tax savings, it builds your team and your relationship with your children, and it teaches them entrepreneurship, accountability and responsibility.

Want a tax and growth plan built around your family? Book a Strategy Call with Dr. Eukeethia B.