It is now common understanding that small businesses fail from their first year of registration or operation, whichever comes first. Because of this struggle, many small business owners employ several strategies to stay in business. One of which is tax strategies that have a positive impact on their cash flows. In the past weeks and more to come, I am discussing one such tax strategy – hiring or paying your child. In this article, I am helping you make sure that you follow the rules when you hire your child. Without that, you will be doing it for no benefit. In the end, you can end up being another statistic of a failed business.
Below, I give you the three essential rules for hiring your child.
1. Make sure that they are a Genuine Employee
The first question to ask yourself when hiring your children is, are they bona fide employees? The second one should be, how do I make them bona fide employees? A bona fide employee simply means a genuine employee, as stipulated by the employment and labor laws.
How do you make one such a lawfully employed individual?
Firstly, as an employer, you must have an employer identification number to use when dealing with IRS matters. This is an important step if you are registering your business for the first time so that you can hire your child. There are not many steps involved in obtaining this employer identification number (EIN). There is no need to panic about it as I will provide such information in my upcoming How to Hire your Child Masterclass, which you can register for the waiting list now.
To make your child a bona fide employee, you must also ensure that they are hired legally, with a standard employment contract stipulating their duties, working hours, salary, and other conditions fulfilling the Fair Labor Standards Act (FLSA). The responsibilities that your child performs for your business must be within the ‘ordinary and necessary’ brackets for your business. For example, if you own a coffee shop, you can hire your child to sort disposable coffee mugs because it is required in the business. But you cannot hire them using a contract that says they are providing ‘typing services’ when that is something you barely do in your company
2. Follow the Tax Guidance
Indeed, hiring your child shifts some or most of your taxable income to the child you employed. But for this to be a reality, you must do it within the tax guidelines. What are these? These are rules set out by the IRS, stating the conditions in which you can hire a child and deduct their wages. These pertain to the ages of the children you can hire and not pay certain taxes and the types of businesses that are allowed to use the hire your child tax strategy. Again, I will talk widely about these important rules in my upcoming How to Hire your Child Masterclass, for which you can register for the waiting list now.
Other legal requirements are providing your child’s social security (SSA) number, the IRS forms you must fill out, and verifying that the child is eligible for employment in your business. Doing these things is not easy, but after attending my How to Hire your Child Masterclass, many things will be clarified, including showing you some easy steps to get it done.
3. Pay them a reasonable salary
Finally, you must pay your hired child a reasonable salary. This means that you cannot underpay or overpay them. What you pay your child must be within an average wage paid for the same job in the industry. However, considering their age and experience, you can pay them a lower salary – but it is advisable to pay them as much as you can to allow for more tax benefits or savings. Besides worrying about paying your child, you must also ensure that whatever you pay them is traceable. This means paying them by check or transfer into their bank account, always, rather than cash. In case you are audited, this payment history will help you win the audit.
The standard deduction set by the Tax Cuts and Jobs Act is massive. By hiring a single child, you automatically redirect a massive $12,550 to your child, based on the 2021 standard deduction. This, of course, is based on an annual $12,550 salary for your child. If you pay them more than this, they will still save because under 18 children hired by parents do not pay social security and Medicare taxes. Overall, hiring your child results in so many savings through taxes. It is worth doing if you have a business and have children that you can employ.
Try this out and start building generational wealth. I always talk to the people without businesses, yet they spend weekends doing people’s hair and make-up for functions. If you run such a side ‘hustle’ as we like to call them, consider registering as a sole proprietor and hire your child to help you. This way, you can save more money by reducing the taxes you pay to the IRS.
Did you get excited while reading this? If so, register for my upcoming How to Hire your Child Masterclass. It will only take a minute to become a part of this critical course.
People have also asked the following questions
- What are the Tax Benefits of Hiring Your Children?
There are two main tax benefits of hiring your child. 1. Their salary is not subject to social security, Medicare, and FUTA taxes. 2. You can deduct their salary as a business expense.
- Why It’s Tax-Smart to Hire Your Children?
Hiring your children does not only result in tax savings, but the money you save is kept in the family. For example, if you pay one child $12,550 in 2021, that will be a full tax deduction, but the money remains in the family through your child.
- Is Hiring Your Child as an Employee a Good Idea?
Yes, this is an excellent idea for both the child and the family.
- What Are Some Benefits of Employing Your Child?
Besides financial benefits, hiring your child also provides more advantages for both the child and the family. For example, it results in outstanding family bonds as well as helping the child become financially savvy.
- What Are the Risks of Hiring Your Child?
There are no known risks of hiring your children. Hiring them results in several tax benefits and other benefits, such as learning how to run a business at a young age.