Running a family business offers a unique opportunity to not only impart valuable life skills to your children but also to capitalize on significant tax-saving advantages. Hiring your kids can foster a strong work ethic, financial responsibility, and facilitate future savings while retaining wealth within the family. This practice often leads to a workforce characterized by commitment, teamwork, and loyalty, creating a foundation akin to a family dynamic.
In addition to these intrinsic benefits, the tax advantages associated with employing your children have become even more substantial with the enactment of the Tax Cuts and Jobs Act (TCJA). Understanding these benefits and adhering to legal guidelines ensures a seamless integration of your children into the family business while optimizing tax savings.
Tax Breaks Under the TCJA
1. Tax-Free Earnings The TCJA elevated the standard deduction to $12,550, rendering the first $12,550 of your children’s earnings tax-free. This tax break applies to both minors and those above the age of 18, providing a considerable annual saving. Even if their earnings surpass this threshold, the TCJA establishes reduced tax rates, further contributing to your family’s overall tax reduction. Notably, your child’s salary remains a deductible business expense, offering an additional reduction in taxable income.
2. Payroll Tax Exemption Parents operating as sole proprietors, husband-wife partnerships, or specific LLC structures may benefit from a payroll tax exemption on their children’s wages. This exemption spans both Social Security and Medicare tax (FICA) and federal unemployment tax (FUTA). While applicable to kids under 18 for FICA and under 21 for FUTA, this exemption strategically redistributes income from your higher tax rate to your child’s lower rate.
Navigating Business Structures
Sole Proprietorships, Partnerships, and LLCs For businesses structured as sole proprietorships, husband-wife partnerships, or single-member LLCs taxed accordingly, the payroll tax exemption is particularly advantageous. It facilitates the reduction of your child’s tax rate while streamlining your family’s overall tax obligations.
Corporations (S or C) Corporations, whether S or C, don’t qualify for the payroll tax exemption. However, strategic planning can still be employed. Creating a family management company, separate from the primary business, allows for payroll tax savings while adhering to legal norms.
Ensuring Compliance with the IRS
While the tax benefits are substantial, it’s crucial to comply with IRS criteria to prevent abuse of these provisions. Your children must perform legitimate work commensurate with their age and skills, exceeding routine household chores. Keeping accurate records, including filing W-2s, and adherence to federal and state child-labor laws are imperative.
Exploring Job Opportunities for Your Kids
Empowering your children to contribute meaningfully to the family business involves assigning tasks that align with their capabilities. This not only imparts valuable experience but also aids your business operations. Potential roles may include modeling for advertising, answering calls, office cleaning, car washing, updating customer lists, managing mailers, and handling social media posts.
Strategic Consultation for Business Optimization
As you navigate the intricacies of employing your children and maximizing tax savings, consulting with a seasoned professional is essential. Your dedicated Family Wealth and Estate Attorney, well-versed in business planning, can offer tailored guidance and ensure compliance with legal standards. This personalized approach safeguards your business from potential IRS scrutiny while optimizing its financial efficiency.
Conclusion: A Holistic Approach to Family Business Success
Beyond the immediate advantages of tax savings, integrating your children into the family business fosters a collaborative and dedicated team. While AI and technology play essential roles in business efficiency, the human touch, especially in legal and strategic planning, remains irreplaceable. As your trusted advisor, I am committed to steering your family business through every stage, ensuring its resilience and prosperity. Schedule an Exclusive Legacy Planning Session here to explore tailored solutions for your unique business needs.
This article is presented by Michelle Bell, an expert in estate planning and business succession services. Our office provides comprehensive legal support for businesses, assisting you in making informed decisions throughout your entrepreneurial journey and in planning for future contingencies. We also offer a specialized session where we review your business’s legal structures. To arrange this consultation, please click the following link: https://calendly.com/mcblawpllc/30min.
The information in this article is intended purely for educational and informational use and should not be considered as advice on ERISA, tax, legal, or investment matters. For advice specifically tailored to your unique situation, such advice should be sought independently from this educational content.