Considerations for Hiring Your Child as an Employee
Hiring your child to work in the family business can be a win-win situation for both you and your child. A child employee offers you tax advantages not available with other employees. There are also potential tax savings for the child employee, who can set aside that money for college or retirement. If you are thinking about hiring your child as a part-time worker or a full-time employee, you need to be aware of the applicable laws to reap the greatest benefits—and to avoid running afoul of the Internal Revenue Service (IRS).
Benefits of Hiring a Child Employee
Hiring your son or daughter has numerous benefits for both parent and child.
Developing good work habits during youth creates a foundation for the rest of life. When teenagers get a job, they learn strong work habits, improve their time management and organizational skills, and have an opportunity to earn and save money. Work can also build confidence and a sense of independence.
While parents might be hesitant to overburden their children, evidence suggests that work experience is beneficial for young people. Research indicates that teenage work is associated with higher earnings later in life, lower pregnancy and crime rates, and higher high school graduation rates.
Child Employee Tax Advantages
Children working for the family business get to keep more of the money they earn, as long as the business is a sole proprietorship, a partnership owned only by you and your spouse, or an LLC that is treated as a sole proprietorship or a husband-wife (only) partnership for tax purposes.
According to the IRS, if your child is under age eighteen and works for your unincorporated family business, their wages are exempt from Social Security, Medicare, and Federal Unemployment Tax Act (FUTA) taxes. If your child is under age twenty-one and works for your unincorporated family business, their wages are exempt from FUTA taxes (but they still have to pay Medicare and Social Security taxes). These payroll tax breaks are available for part-time and full-time child employees. However, payment for the services of a child employee, regardless of age, are subject to income tax withholding.
In addition, under the Tax Cuts and Jobs Act (TCJA), which nearly doubled the standard deduction through 2025, your child employee can use the standard deduction to shelter up to $12,500 of 2021 wages paid by your business from the federal income tax. In other words, unless your child has income from other sources, they owe no federal income tax on the first $12,500 they earn in wages from the family business this year.
Parent Employer Tax Advantages
Parents who hire their child qualify for a business tax deduction that reduces their federal income tax bill and may also lower their self-employment tax bill and state income tax bill (if either are applicable). The tax deduction, which is deducted as a business expense, equals the amount of wages you pay your child to work in the business. This deduction is available to incorporated and unincorporated businesses.
Fair Labor Standards Act Benefits of Hiring Your Child as an Employee
The Fair Labor Standards Act (FLSA) is a major United States labor law. It not only created the rights to minimum wage and overtime pay, but also includes a number of provisions related to child labor.
However, the FLSA exempts family businesses from several of these provisions. For example, minimum age restrictions and minimum age rates generally do not apply to children working in a parent-owned business, except in occupations where minors under age eighteen are not allowed to work. You can learn more about FLSA exemptions on the Department of Labor website. However, be sure to check state labor laws, which may impose stricter requirements.
Be Truthful When Claiming Child Employee Tax Benefits
Hiring children is a strong tax-saving strategy for parents and children alike. If you follow the rules, the family can come out ahead at the end of the year. At the same time, the tax breaks create an incentive that might inspire some to bend the rules.
The IRS knows this and is on the lookout for taxpayers that untruthfully claim the benefits of hiring child employees. Avoid the temptation to claim a benefit that does not correspond to reality. If you do hire a child, they must be a bona fide employee performing legitimate work at a reasonable rate of compensation. Fill out all of the necessary paperwork and comply with all legal requirements. Failure to do so could result in a loss of tax breaks and an IRS audit.
Running a small business is a big responsibility. You wear many hats in your business, but legal professional probably is not one of them. When in doubt about laws that affect small business owners, it is okay to get help. We are here. Please reach out to our office and schedule a meeting to get professional advice about a tax-saving strategy that could keep more money in your family.