Tax Truths: Can I Hire My Kids?

You might have heard that hiring your kids to help out is a great way to save on taxes if you have your own business, and it’s true! Their wages are a deductible business expense lowering your taxable income. Your children will only pay federal income tax on wages exceeding the standard deduction which is $13,850 for single filers in 2023. If they’re under 18, you may not need to withhold or pay Social Security and Medicare taxes on their wages either (although there are exceptions). As long as you’re in a higher tax bracket, you’re effectively shifting a portion of your business income to your kids’ much lower tax bracket. It seems like a no-brainer but before you rush to get them on payroll, there are important rules to know. 

The first is that your kids must be doing legitimate work for your business. Examples include data entry, office cleaning, handling your social media accounts, and running errands. They also must be old enough to reasonably perform the job you’ve hired them to do. It’s good practice to keep records substantiating their tasks, dates worked, and hours.

The second is that their compensation must be reasonable. Think of what you’d pay an unrelated person to perform the same service (probably not $150/hour for running errands). Although it’s better from a tax perspective to pay your kids as much as possible, that’s a very quick way to raise red flags with the IRS. You should also pay your kids through check or direct deposit so you’re able to prove how much you paid them. 

Finally, make sure you’re complying with employment laws. This includes having your kids fill out Forms W-4 and I-9 when you hire them. You should also provide them with a W2 at the end of the year and have them file a tax return if necessary. Talk to your accountant beforehand if you have any questions about the process!