The advantages of hiring your own children for summer jobs

If you’re a business owner and you hire your children this summer, you may be able to get tax breaks and other non-tax benefits.

The kids can gain valuable work experience, save for college and learn how to manage money. You may also be able to shift some of your high-taxed income into tax-free or low-taxed income, and, depending on the situation, you may realize payroll tax savings. Perhaps best of all, your kids will be able to spend time with you.

A legitimate job and tax savings, too

If you hire your child, you will get a business tax deduction for employee wage expenses. In turn, the deduction reduces your federal income tax bill and possibly your self-employment tax bill and your state income tax bill if they apply. However, for the wages to be a deductible business expense, the work performed by the child must be legitimate and the child’s pay must be reasonable.

Let’s say you operate as a sole proprietor in the 37% tax bracket and you hire your 16-year-old daughter to help with office work full-time during the summer and part-time in the fall. She earns $10,000 during 2024 and has no other earnings.

You save $3,700 (37% of $10,000) in income taxes at no tax cost to your daughter. That’s because she can use her $14,600 standard deduction for 2024 to completely shelter her earnings.

Your family’s taxes are lower even if your daughter’s earnings exceed her standard deduction. Why? Her unsheltered earnings will be taxed at her beginning rate of 10% instead of being taxed at your higher rate.

Reduced payroll taxes

If your business is not incorporated and certain conditions are met, your child’s wages are exempt from Social Security, Medicare and federal unemployment taxes. Your child must be under age 18 for this to apply, or under age 21 for the federal unemployment tax exemption. Consult a tax professional to learn how this works.

Be aware that there’s no payroll tax exemption for employing your child if your business is incorporated or is a partnership that includes nonparent partners. And payments for the services of your child are subject to income tax withholding, regardless of age, no matter what type of entity you operate.

Extra time to make your child’s retirement garden grow

An early start on saving for retirement can be key to building wealth. A child who earns income from a job can contribute to a traditional IRA or a Roth IRA and begin funding a nest egg. For the 2024 tax year, a working child can contribute up to $7,000 to a traditional or Roth IRA. And the money may be tapped penalty-free for certain eligible reasons, such as paying education costs and making a down payment of up to $10,000 on a first home.

What if your business has a retirement plan? Depending on its terms, your child may qualify to begin earning retirement benefits that can grow for many decades.

The importance of accurate records

Hiring your child can be a smart idea tax-wise. But be sure to keep the same records (such as timesheets and job descriptions) that you would for other employees to substantiate the hours worked and duties performed. Also you must issue your child a Form W-2.

This column is for information only and is not intended as advice. Tax matters are almost always complicated and can cost a lot of time and money if mishandled. If you plan to employ your minor child, consider consulting a tax professional.

Norm Grill, CPA, (N.Grill@GRILL1.com) is managing partner of Grill & Partners, LLC (www.GRILL1.com), certified public accountants and consultants to closely held companies and high-net-worth individuals, with offices in Fairfield and Darien, 203 254-3880.