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Experts say if you’re self-employed, hiring your children can provide tax benefits — as long as you comply with labor laws and IRS regulations.
Small businesses hiring their own kids is a hot topic among social media influencers on platforms like TikTok, Instagram and YouTube. But tax professionals say they often struggle with misinformation in such posts.
“Most of the videos on TikTok have some level of truth to them, but they’re embellished or only make sense in very specific circumstances,” said Ma, a registered agent in Rochester, N.Y., and owner of MDM Financial Services. Matt Metras previously told CNBC.
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“But when you have a 60-second video, you’re not trying to convey that nuance,” Metras said.
Here are some key things to know if you plan to hire your child this summer, financial experts say.
Employing your kids can be “tax efficient”
“Employing your children can be a tax-efficient move,” says Sean Lovison, a certified financial planner and founder of Philadelphia-area Specialty Financial Services. “Their wages can be deducted as a business expense, which can save your small business a lot of money.”
In 2024, the federal standard deduction for a single filer is $14,600.
“If your child’s income is within the limits, they may not have to pay any income taxes, which can be a win-win,” said Lovison, who is also a CPA.
Additionally, according to the IRS, payments to children may avoid Medicare and Social Security taxes, depending on the child’s age and your legal business structure.
If your child’s income is within the limits, they may not have to pay any income taxes, which can be a win-win.
Sean Lovison
Founder of Dedicated Financial Services
Once your children have earned “earned income,” or employment wages, they can contribute to a Roth IRA, which is great for young savers, experts say.
Carol Fabbri, CFP, managing partner at Fair Advisors in Conniff, Colo., says children enjoy a triple tax benefit: They typically pay little to no tax on contributions, growth is tax-free, and withdrawals in retirement are usually tax-free.
“It’s never too early to get into the habit of saving,” she adds.
However, you need to be aware that the contribution limit for 2024 is the lesser of your child’s gross income or $7,000.
What you need to know before hiring a child
Experts say it’s important to understand state and federal labor laws and tax regulations before hiring a child.
“Some states prohibit the employment of children under 14 under almost any circumstances,” Lovison said.
If hired, your child must do real work for the business, and their pay should be commensurate with their tasks.
“Record-keeping is non-negotiable,” Lovison said. “Not only will it help you understand the tax landscape, but it can also serve as a valuable resource if any issues arise with your child’s employment.”
According to the IRS, payments to a child are subject to income tax regardless of the child’s age. Lovison said hiring children as W-2 employees and having taxes withheld “can cover your bases,” but if they qualify for the standard deduction, they’ll get the full tax refund.
