Understanding How to Pay Your Kids in Your Business

Title: Understanding How to Pay Your Kids in Your Business

Many business owners wonder about the possibility and process of paying their children through their company. This topic often comes with questions about legality, tax impacts, and what steps need to be taken.

If you’re curious about whether this is allowed, it’s reassuring to know that the IRS does let business owners pay their own children. This arrangement needs to be legitimate, children should actually work in the business, and their compensation should match what would be paid to someone else doing the same job. The goal is for the work and pay to be reasonable and necessary for the business.

Some families are interested in the potential tax savings. When children under the age of 18 are paid by a parent’s sole proprietorship or a partnership where both parents are the only partners, their earnings can be exempt from Social Security and Medicare taxes. They may also avoid federal unemployment tax until they turn 21. For the children, wages below the standard deduction for the year aren’t usually taxed at the federal level, which can mean tax-free income if earnings do not exceed that threshold.

It’s important to keep things aboveboard. The business should have clear records: just like with any employee, provide a job description, track hours worked, and pay by check, not cash. W-2 forms should be issued at year-end, and any local or state labor laws also apply, including rules about minors and their ability to work.

A common point of confusion is which business entities qualify for this exemption. The Social Security and Medicare tax exemption for wages paid to children under 18 applies only to sole proprietorships and partnerships with both parents. This break doesn’t extend to corporations, S corps or C corps, even if family members run the company.

Families sometimes wonder what kind of work their children can do. Common examples include cleaning the office, filing, answering phones, posting on social media, creating flyers, or helping with inventory. The key is that the work is necessary and appropriate for the child’s age and skills.

To ensure the arrangement is viewed as legitimate, it helps to pay a reasonable wage. Compare the pay rate to what you’d offer a non-family employee, and always clock hours and document tasks. Keep proof of payment and ensure the funds go directly to the child, ideally in a bank account that’s in their name.

In summary, paying your kids through your business can have benefits for both you and your children when handled correctly. Remaining transparent and organized supports the legitimacy of the arrangement, aligning with tax rules and labor regulations. This approach can offer meaningful work experience to your children and, in some cases, tax advantages for your family and business.