NASE Blogs

Hiring Your Child

Tuesday, February 23, 2010
Q: I heard I could hire my child and take a tax deduction. How does that work?

A: Allowance isn't deductible, but wages are! Put your child to work and take the deduction!

First of all, don't go out and have kids just for this - that's a bad idea. But if you do have a kid, put them to work in your business. They can file things, answer the phone, clean your home office...anything you can think of that is appropriate for them to do. It will give them a chance to learn about your business, and also teach them responsibility and other valuable skills. You need to pay them a reasonable wage ($7 an hour, $8 an hour, something like that), have them fill out a time card, and then you need to cut them a check every Friday or twice a month, just like you would with another employee.

Your child will not need to file a tax return if they earn less than $5,600. This is tax free income to your kid, and these wages aren't subject to payroll taxes (FICA, Medicare, state unemployment, FUTA). The wages you pay your child are then fully deductible on your Schedule C. You are already giving them the money, so why not make it a full tax deduction on your return?

If there is another youth in your community that you are mentoring or supporting, don't just give them the money, you can hire them as well. These wages will be subject to payroll tax, but it's still a great opportunity.

You can't just give your kids money and call it wages, you need to make them do something. The real cost in hiring your child is in doing the paperwork. You need to do the paperwork and do the payroll tax return. You don't need to file quarterly returns (Form 944) if you owe less than $1,000 in payroll tax liability (you'll only need to file at the end of the year).

When your child turns 18, their wages will be subject to payroll taxes like FICA and Medicare. When your child turns 21, FUTA will also apply to their wages.

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