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Ask The Experts: Hiring Your Child

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Q: I remember reading an article in your magazine a few years ago that said something like if you pay your 15-year-old child $500 per month until they are 21 years old and they save the money in an account, it would be worth over a million dollars when they turned 50. Can you clarify the specifics of this for me?

A: I believe you’re referring to the concept of hiring your child. The idea is a great planning strategy and really a no-brainer for the sole proprietor who has a child who can 
help in the business.

Here are the facts: You are probably already giving your 15-year-old child a significant amount of money each year. Not just an allowance, but also college savings, gas money, clothing, sports and extracurricular activities—all of these items add up to a big number!

 Instead of just giving your child the money or transferring your after-tax dollars into a college savings account, why not create a job for your child? Put them to work by finding something in your business that they can do to help. Have them work a couple of hours after school during the week, and then maybe four or five hours on the weekend. Pay them a reasonable wage, such as $12.50 an hour, and before you know it you’re paying them about $6,000 a year in wages. These are wages from a real job, with a real job description, real payroll tax returns, a real W-2 at the end of the year, and all of the applicable paperwork for a real employee.

The good news is that the wages that a child younger than 18 earns working for their parent’s sole proprietorship up to $6,100 are tax free. The child doesn’t even have to file a tax return. But for you, the sole proprietorship, that $6,000 in wages paid to your child is fully tax deductible as wages on Line 26 of your Schedule C form. That deduction reduces your taxable income and your income subject to self-employment tax. So, a small-business owner in the middle income tax bracket of 25 percent will save over $2,400 in taxes by creating this new job. That is 25 percent for federal income tax and 15.3 percent in self-employment tax for a total of 40.3 percent or $2,418.

The best news of all is that this was money that you were already spending. Creating a job and paying your child $6,000 per year and having them deposit that money in a savings account would be a tremendous idea for the long term. 

Keith Hall, NASE Tax Expert


The NASE’s small-business experts are here to help you understand the ins and outs of operating a successful small business. And access to these professionals is free with your NASE Membership!

 Just go online to the NASE Business Learning Center where you can ask the experts questions about:

  • Taxes 
  • Marketing
  • Financial issues 
  • Employee relations
  • Accounting rules 
  • And much more
The experts are available 24/7 and ready to help!

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