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If you have your own business, putting your child on the payroll may be a good idea.
The amount you pay your child is a tax deductible expense for your business thus lowering the taxable income of your business. Plus, the income is tax free to your child as long as it stays under the standard deduction amount. That amount is $13,850 in 2023. Depending on which tax bracket you fall into, if you pay your child $13,850 you could save over $5,000 in taxes. Your child can then put that money into savings or a 529 plan to pay for college. So, not only are you lowering your taxable income and thus your tax liability, you are also helping your child do things like avoid student loan debt or start their savings for their long term investment goals. Getting ahead young is key to achieving financial goals and when you can help your child in this way while also lowering your tax liability, that is a WIN WIN in my book!
So what types of jobs can my child do? This is where you want to make sure you are following labor laws and paying your child a reasonable rate. And of course, have plenty of documentation to substantiate the work your child did. If you were to be audited and you don't have the proof as to the work your child did, then the IRS will disallow the deduction. The types of jobs that are good to have your child do include things like cleaning the office, filing, basic paperwork, and computer entry. You can't have your minor child doing something dangerous such as operating heavy machinery. You also don't want to pay your child an excessive rate for the work they are doing such as $30 an hour for filing paperwork.
There isn't a minimum age requirement for putting your child on the payroll but you want to make sure the job is appropriate for their age. If you are a photographer then you could justify using your 3 year old as a model for your sample portfolio. However, if you own a plumbing business then a position for a 3 year old would be difficult to justify. Bottom line is ask yourself would the average person think this is a reasonable job for a child their age and is the pay reasonable for the work being performed?
You may be asking but what about payroll taxes? Well, that depends on what type of entity structure your business is. If your business is a sole proprietorship, LLC, or partnership then you don't have to worry about social security, medicare, or FUTA taxes! However, depending on what state you are in, you may need to include your child on your workers comp policy. Plus, you don't have to issue a W2 to your child (since there are no withholdings). If your child does plan to contribute to a Roth IRA then you will want to consider issuing a W2 to support the earned income but otherwise you don't need to issue a W2.
If you do have an S or C Corporation then the withholding piece isn't quite as easy but there is still a way you can do this! If your structure is an S or C corporation then you would have to do the FICA piece. However, what you can do instead is to pay a separate sole proprietor or single member LLC a "management fee" and then pay your child out of that entity. The management fee is tax deductible on your corporation and avoids the FICA (payroll tax) issue. Then you pay your child out of the sole proprietor or LLC entity and avoid having to do withholding and issue a W2.
For example, my son is 16 and he does work for my business. He does mostly computer work. I am not a tech-y person and he assists with website and digital editing. It is a reasonable role for his age and I can substantiate the work he does. He is legitimately doing work that I would have to pay someone else to assist me with so it is a WIN WIN when we are able to work together, I get a tax deductible expense for my business, and he receives income that he uses to put gas in his car while also starting to save and invest for his future!
A job in high school can be a great experience for kids! They can learn responsibility, expose them selves to new things, and earn some money in the process. The problem is, scheduling can be hard especially if your child plays sports. When you are able to put your child to work in your own business, you have the ability to schedule their work in a way that still allows them to prioritize school and sports. Maybe your child only works in the summer for your business. When I was in high school, I worked in the summer at our family business doing filing and stuff like that and then in the evenings I worked at a restaurant. It kept me really busy but I learned a lot and I was able to save money.
Even if your business is a side hustle, consider hiring your child if there is work they can do for you. They can learn so much if you are in the start up phase and they help you grow. It just may spark their own entrepreneurial spirit. In an age where teens are glued to their smart phones, exposing them to other avenues of life can give them a different perspective on their own life and what they want to do with it. The world is a very different place than it was when I was a teen. Giving your child learning experiences can help them gain confidence.
Summer is right around the corner so if you have a small business and your child is ready to work and earn some money, this just may be the answer you are looking for!
NOTE: This information is for federal tax purposes. States will vary.
Information contained in this post is for educational purposes only and it not considered financial advice.