You can still benefit by hiring your children during the taxable years after December 31, 2017 and before January 1, 2026! We will break down how small business owners can file to their greatest advantage this tax season:
One of the most notable changes in the Tax Cuts and Jobs Act is that the standard tax deduction for employing your children under the age of 18 has increased from $6,350 in 2017 to $12,000 in 2018. This means that you can hire your kids, pay them up to $12,000, and owe nothing to the federal government in taxes if you operate your business as a sole proprietorship, a husband-and-wife partnership, or a single-member LLC. No social security, no medicare, no federal unemployment taxes will be taken out from your child’s wages.
While S and C corporations and non-spouse partnerships do not qualify to avoid paying income taxes, the 2018 tax law still allows for some tax breaks. On your corporation’s tax return, you can deduct your child’s wages as a business expense. Also, you can save the wages that your child earned that were sheltered from income taxes to save for college or fund annual Roth IRA contributions.
You must remember a few things, though, when hiring your children to work for your small business. Your child must be treated as if they were any other employee, even though they are receiving much better tax deductions than Suzanne in Marketing. We ask that you do these following tasks to keep your records of your child’s employment in tact by the time tax season rolls around:
Keep a detailed record of their employment. Just like your adult employees, your kids will need to have backlogs tracking their weekly hours and wages in order to legitimately prove that they worked for you. Remember to make the time spent changing hats between parent and boss worth it to you at the end of the tax season by being able to provide evidence that you should receive that tax break. After all, you deserve it.
Issue regular paychecks. Whether it is to keep your kids or the federal government out of your hair, give your children regular paychecks for the work that they do at your small business to prove that their wages are ordinary and necessary to your company.
Document and prove the worth of your children’s employment, so that the government cannot say you’ve simply handed a job to your children that wasn’t integral to the workings of your business. Don’t just hand your child the “household chores” of the office. The government needs to see that your child’s job was important. If the government doesn’t think that your child’s job was valuable to your daily practices, then they won’t cut you any slack on taxes.
How do you want to set up your and your child’s future? If you could save money today on business expenses, you could put more towards bettering your business and bettering your child through giving them work experience and building their savings.
Want more information? Schedule a meeting with your account manager for an in-depth breakdown on how the Tax Cuts and Jobs Act affects you, and set up a greater future for your children and your company.