If you have your own business and you’re making money, you’re probably giving some of that money to your children. That could be by giving them an allowance every month, savings account, or paying for their college, etc. By hiring your kids in your business, you could be giving them that “allowance” or money by earning it. This is not only beneficial for your child but it could also save you some money at the end of the year.
Standard Deduction Before New Tax Law
First of all, standard deduction helps reduce the amount of income you have to pay tax on. In 2017, the standard deduction for a single person was right about $6,350. It was a great idea then to hire your child and pay them up to that amount. Those wages you could subtract the standard deduction and would have zero taxable income and pay $0 income tax.
So you were transferring those $6,350 from yourself, at your tax rate, to your child at a zero tax rate. Nonetheless, The Tax Cuts and Jobs Act has made this even better.
How This Has Improved Under The New Tax Law
The improvement made by the New Tax Law is that the standard deduction for a single person is $12,000. So that means that you can pay your child up to that amount, as long as that is a reasonable wage for the work that they do, and when they have their tax return they get to subtract $12,000 and pay $0 on income tax.
Will this change based on the type of corporation you have?
Depending on whether you have a Sole Proprietorship or an S Corp, you might have to pay payroll tax on it. More than likely, the amount you would have to pay would still be significantly less than what you would pay under your own income.
So why not hire your child in your business? Just think about what you are teaching your child. They are learning how to work for a living, learning how to grow in a business environment and helping them save some money for themselves. As well as them helping you save some money on your business. For any tax savings questions give us a call! We’ll be glad to help.