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If you are self-employed, Employ your children can provide Tax advantages – Provided you follow labor laws and IRS rules, experts say.
Small businesses hiring their kids is a popular topic among Social media influencers On platforms like TikTok, Instagram, and YouTube. But tax professionals say they often combat misinformation from such publications.
“Most videos on TikTok have a kernel of truth to them, but they are embellished or only make sense in very specific situations,” Matt Mitras, a registered agent in Rochester, New York, and owner of MDM Financial Services, previously told CNBC.
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“But when you have a 60-second video, you’re not trying to convey that nuance,” Mitras said.
If you’re planning to hire your kids this summer, here are some key things you should know, according to financial experts.
Employing Your Kids Can Be ‘Tax Smart’
“Employing your child can be a smart move,” said certified financial planner Shawn Loveson, founder of Purpose-Built Financial Services in the Philadelphia area. “Their wages can be deducted as business expenses, which can result in significant savings for your small business.”
For 2024, the federal standard deduction for single filers is $14,600.
“If your child’s income falls within the limits, he or she may not owe any income tax, which can be a win-win,” said Loveson, who is also a certified public accountant.
In addition, payments may be made for children Avoid Medicare and Social Security taxesdepending on the child’s age and your legal business structure, according to the IRS.
If your child’s income falls within the limits, he or she may not owe any income tax, which can be a win-win.
Sean Loveson
Founder of Purpose Driven Financial Services
Once your child has “earned income” or is paid from work, they can Make a Roth Individual Retirement Account Experts say these contributions can be powerful for younger savers.
there Triple tax benefit for children: They typically pay little or no taxes on contributions, plus growth is free of fees and withdrawals are generally tax-free in retirement, according to Carol Fabbri, managing partner of Fair Advisors in Conifer, Colorado.
She added: “It is never too early to get into the habit of saving.”
However, you must watch the contribution limit for 2024, which is your child’s total earnings or $7,000, whichever is smaller.
What you should know before hiring your children
Before hiring your children, it’s important to know state and federal employment laws, along with tax rules, experts say.
“Some states pretty much prohibit you from hiring kids under 14 under any scenario,” Loveson said.
If they are hired, your children must do real work at the company, and their compensation must be reasonable to match their tasks.
“Record keeping is non-negotiable,” Loveson said. “Not only does it help you navigate the tax landscape, but it also serves as a valuable resource should any questions arise about your child’s employment.”
Payments for children are subject to Withholding income tax Regardless of the child’s age, according to the IRS. Employing children as W-2 employees and withholding taxes “covers your bases,” but they will get a full refund on taxes paid if they are subject to the standard deduction, Loveson said.
