Maximizing Benefits: Hiring Your Kids for Tax Advantages, Skill Development and Succession Planning
Engaging your children in your family-owned business can be a strategic move, offering a range of benefits for both your business and your children's development. Beyond mere familial ties, this decision offers a plethora of advantages, from tax optimization to fostering skill development and seamlessly planning for the future. Here are some compelling reasons to consider hiring your kids:
Tax Benefits: Hiring children under 18 in a parent-owned business (sole proprietorship or LLC) can yield significant tax advantages. These include exemption from Social Security and Medicare taxes, deductions for their salaries, and the application of the child's lower tax rate, reducing overall taxable profit. These benefits reduce the business's taxable profit, offering both tax optimization and opportunities for children's development within the family business.
Asset Transfer and Wealth Building: Employing your kids provides an opportunity for asset transfer. Wages paid to them can be directed into savings accounts, education savings accounts, or Roth IRAs, facilitating wealth transfer without incurring gift or estate taxes. This strategic approach enables you to build family wealth while providing valuable financial education and opportunities for your children's future.
Personal Development & Skill Acquisition: In addition to financial benefits, hiring your kids imparts essential business skills. From problem-solving to financial literacy, real-world experience contributes to their personal development and enhances their prospects for the future. This real-world exposure not only enriches their personal development, it also enhances their long-term prospects, giving them essential capabilities for navigating the business world confidently.
Succession Planning: Introducing children to business operations early lays the groundwork for succession planning. By familiarizing them with the business from an early age, you ensure seamless continuity and prepare the next generation to step into leadership roles with confidence. This approach not only safeguards the business's future, it also generates a sense of responsibility and commitment to its long-term success within the family.
Tax-Saving Strategies: This tax-saving strategy for businesses with children aged 7-22, allows an annual tax-free salary of $14,600 per child. This strategy involves deducting the payment from the business income, reducing taxable income, and potentially combining it with IRA and 401k strategies for additional benefits.Your child then would file their own tax return. The standard deduction for 2024 is $14,600 and since you paid your child $14,600, it makes their taxable income zero.
IRS Compliance and Rules: While hiring your children can offer tax advantages, adherence to IRS rules is crucial. Legitimate work is a prerequisite, with payments generally exempt from Social Security and Medicaretaxes for children under 18. However, income above specific limits is subject to income tax.It's crucial to maintain professionalism in these arrangements. Salaries should be commensurate with the child's age, skills, and the value they bring to the business. All transactions must be appropriately documented, adhering to standard employment practices.
Documentation is key, with proper records of employment, time sheets, and payments essential. Consulting with a tax professional is recommended to ensure compliance with applicable laws.
Payroll Tax Workaround for Corporations: There are some challenges to this strategy for corporations when hiring an owner’s child. Given this, a workaround involves a family management company—a sole proprietorship or partnership separate from the corporation. This entity charges the corporation a management fee for services, enabling tax-free payments to children from the management company while complying with IRS standards.
Hiring your children can offer tax advantages while also providing opportunities for wealth building, skill development, and succession planning. Understanding IRS regulations and maintaining compliance is vital for maximizing these benefits. KerberRose is eager to help you and your business find the most tax advantaged path to business management. Contact any of our Trusted Advisors for guidance on how to begin the process of hiring your kids to work for your business