When it comes to running a small business, finding ways to save on taxes can be crucial for success. One popular strategy that has been getting a lot of attention on social media platforms like TikTok, Instagram, and YouTube is hiring your own children. While this can indeed provide tax benefits, it is important to ensure that you are following all labor laws and IRS regulations to avoid any potential issues down the line.
Certified financial planner Sean Lovison, founder of Philadelphia-area Purpose Built Financial Services, points out that hiring your child can be a tax-savvy move. By deducting their wages as a business expense, you can potentially save a significant amount for your small business. Additionally, if your child’s income falls within certain limits, they may not owe any income tax, which can be a win-win situation for both parties.
Once your child has earned income, such as wages from employment, they can start making Roth individual retirement account contributions. This provides a powerful opportunity for younger savers, as they can benefit from a triple-tax advantage. Contributions are typically taxed at a low rate or not at all, growth is tax-free, and withdrawals in retirement are generally tax-free as well. This can help set your children up for a secure financial future early on.
Before hiring your children, it is crucial to be aware of both state and federal labor laws, as well as tax regulations. Some states have restrictions on hiring children under a certain age, so it is important to do your research beforehand. Your children should also be performing real work for the business, and their compensation should be reasonable based on the tasks they are completing. Keeping detailed records is essential for both tax purposes and to address any potential questions about your child’s employment in the future.
While hiring your children for your small business can offer tax benefits and help them start saving for the future, it is important to approach this strategy with caution. By following labor laws and IRS rules, you can ensure that you are taking advantage of the potential savings without running into any legal issues. With proper planning and documentation, hiring your kids can be a smart financial move for both your business and your family.