Things to Consider When Employing Your Teenage Children in Your Business
Children, Tax Deductions, Legacy, & Generational Wealth
Disclaimer: This content has been made available for informational and educational purposes only and is not meant to be a substitute for legal, accounting, or other professional advice. If you have specific questions about any legal matter, you should consult with an attorney or other professional services provider.
It’s one of the least understood ways to lower your tax obligations. Yet it’s one of the easiest. And it’s one of the best strategies for entrepreneurs interested in building generational wealth. (Isn’t that all of us?)
What is it? Employing your teenage children in your businesses.
What Constitutes Employing Your Teenaged Child?
If the teenage child performs household chores or other minor tasks, they are generally not considered employees and do not need to pay taxes. However, if the teenage child is performing substantial work, such as administrative or managerial tasks, they are considered employees and are subject to all employment taxes.
The Potential Tax Benefits
As mentioned above, teenage children who work for their parents are subject to the same tax rules as any other employee. However, there are some important factors to consider:
Tax Benefits: Hiring minors under 18 years of age can result in tax savings for business owners. The wages paid to minors are tax-deductible expenses for the business, reducing the business's taxable income. Additionally, minors under 18 who are the business owner’s dependents may be exempt from Social Security and Medicare taxes, resulting in additional tax savings.
Transfer of Income: Business owners can shift income from themselves to their children by employing their teenage children.
Age: If the child works for their parent's sole proprietorship or partnership, they are not subject to Social Security and Medicare taxes. However, if they are working for a corporation, they are subject to all employment taxes regardless of their age.
The Potential Intangible Benefits
Training and Education: Employing teenage children in the business can provide them with valuable training and work experience. This can be especially beneficial if the teenage child is preparing to take over the business in the future.
Family Bonding: Employing teenage children in the business can create a sense of family unity and strengthen relationships. Working together can provide an opportunity for parents and children to develop a shared sense of purpose and accomplishment.
Things to Consider
Paying Suitable Wages: The wages the teenage child receives for their work must be reasonable and consistent with the amount paid to other employees performing similar tasks. If the wages are deemed unreasonable, the IRS may reclassify the wages as a gift or allowance, which is not deductible by the parent and may be subject to gift tax.
In Conclusion
Remember, it's important to note that employing teenage children must be done in compliance with all relevant labor laws and regulations. The wages paid to minors must be reasonable and consistent with the work performed, and minors must be treated as any other employee, with proper documentation and record-keeping.
Parents should consult with a tax professional and/or legal advisor to ensure they are following all applicable rules and regulations.
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