As a business owner, you might consider giving your child a job in your company. This is not only a good way to teach them valuable skills and responsibilities but could also offer some financial benefits – both for you and your child. However, many business owners fail to properly follow proper tax laws and guidelines when paying their child, which could lead to issues with the IRS.
In this blog post, we’ll give you some helpful tips on how to legally pay your child and avoid getting in trouble with the IRS.
Document your child’s work and pay – One of the most important things you need to do is document your child’s work and pay. You should establish a formal employment agreement outlining the work he or she will do, how much they’ll earn, and when they’ll receive pay. Keep records of the work done and the hours worked, even if it’s just a few hours a week, as you’ll need these details when preparing your tax filings. It is essential that you treat your child’s pay just as you would for any other employee.
Pay your child a reasonable wage – Your child’s pay should be reasonable based on the work they perform and the age. The wage should be in line with what you would pay an unrelated outside employee for the same work. Refrain from paying an excessive salary or giving a raise just to lower your tax burden, as the IRS may view this as an attempt to evade taxes. Additionally, always pay your child through check or direct deposit rather than in cash. This documentation will be necessary if the IRS audits your business. We recommend depositing your child’s pay into a custodial account in the child’s name.
Meet age restrictions – Your child must be at least 7 years old to perform non-hazardous work (such as clerical work, filing, and answering phones) for your business. If they are below 14, the IRS permits employers to pay lower wage rates. If their work poses a potential for danger or harm, such as using heavy machinery, you should consider hiring an outsider, as child labor laws and tax rules are stricter on these types of jobs.
Don’t forget about employment taxes – You will pay your child as a W-2 employee and may need to withhold income taxes. If your business is formed as an S-corporation, a C-corporation, or a partnership, you will also have to pay Social Security, Medicare, and other employment taxes on your child’s income (check out the last FAQ below for a legal hack around this).
Consult a tax professional – Finally, we recommend consulting an experienced tax professional when setting up and paying your child. There are specific state and federal laws that you need to follow, and it may be challenging to interpret them correctly. A tax professional can help ensure you meet all the legal and tax obligations, and guide you through any unique requirements that may apply in your situation.
If you’re considering paying your child from your business, you likely have specific questions. Here’s a number of FAQs we get on paying your children (click to expand):
Paying your child for work is a great way to teach them responsibility and offer them financial benefits. However, as a business owner, you need to ensure you comply with state and federal employment and tax laws. Remember to document your child’s work and pay, pay them a reasonable wage, adhere to age restrictions, pay employment taxes, and consult with a tax professional. By following these guidelines, you can avoid any issues with the IRS while securing your child’s financial future.
Got other questions about how to pay your child from your business? Drop us a note here and we’ll get right back to you.