Employing Your Children

There are tax advantages to putting your teenage son or daughter to work in your business. Wages paid to your child are fully deductible as a business expense. If you are a sole proprietor or a partner in a partnership in which only you and your spouse are partners, you do not have to pay FICA on those wages if the child is under age 18, nor do you have to pay unemployment insurance if the child is under age 21. The child’s wages may be subject to a lower tax rate than if you were to retain the same money as business earnings.

Children will have to pay tax on the salary you pay him/ her to the exent it exceeds the standard deduction. Children, who are likely in lower tax brackets, pay a 10% rate on earned income up to $9,875, and 12% on the next $30,250. A child with earned income receives a standard deduction of up to $12,400 for 2020 and may qualify for an IRA deduction of $6,000, which can total $18,400 free from Federal income tax.

Children may also be partners in partnerships or shareholders in S corporations, which can reduce the overall family tax burden in certain situations.