As a parent, you want to do everything possible to set your child up for success, including instilling a solid work ethic and helping them learn about financial responsibility. One way to accomplish these goals is by employing your child and taking advantage of the tax breaks that come with doing so.
According to the IRS, if you are self-employed or own a business, you can employ your child and deduct their wages as a business expense and reduce your taxable profit. This means you won’t have to pay taxes on the salaries you pay your children. Additionally, your child will likely be in a lower tax bracket than yours, which means they will pay less tax on their income. This doesn’t mean that all their earnings will be tax-free. Generally, you can hire and pay your child up to $13,850 for the year (per child) and not be subject to federal income tax for 2023.
There are a few rules and requirements to follow when employing your child. First, they must be a legitimate employee and perform actual work for the business. This means you can’t just pay them for doing household chores or running errands for you. They must have a specific job in your business and be paid a reasonable wage for the work they do.
Next, you must keep accurate records of employment, including timesheets with the hours your child works and their payments. This is important to ensure you can prove to the IRS that the wages you pay them are reasonable and that they are actually performing work for the business.
Employing your child comes with numerous benefits beyond just the tax breaks. It can teach them valuable skills that will serve them well in the future. They will learn about responsibility, time management, and the value of hard work. It can also give them a sense of pride and accomplishment, knowing that they are contributing to the family business.
On top of that, you can help your child to do more with their salary by starting to start saving early for retirement by investing in a retirement savings account (think 401k or IRA) or offset the cost of education with a Coverdell Education Savings Account or 529 plan.
So, if you own a business, consider employing your child and taking advantage of the tax breaks that come with it. Not only will it benefit your business, but it can also be a great way to teach your child about the world of work and give them a head start in life.
No matter what moves you made last year, TurboTax will make them count on your taxes. Whether you want to do your taxes yourself or have a TurboTax expert file for you, we’ll make sure you get every dollar you deserve and your biggest possible refund – guaranteed.
