How to Legally Hire Your Child in Your Business: Tax Benefits and Labor Law Rules Explained
Thinking about how to hire your child in your business and still stay compliant? This guide lays out everything you need to know, from age requirements to payroll rules, tax breaks, and child labor regulations, to ensure smooth operations and peace of mind for your family and your bottom line.
Why Hire Your Child?
Hiring your child in your family-owned business offers both real-world experience and financial benefits. You gain a trusting employee, and you both may enjoy tax savings through legitimate family employment.
1. Meet Minimum Age Requirements
The Fair Labor Standards Act (FLSA) sets federal rules. In non‑agricultural businesses, children must generally be at least 14 years old to work. But if the business is family‑owned, younger kids might get involved in safe tasks, like organizing files or assisting with light work. Always check your state child labor laws for any stricter rules.
2. Set Up Payroll Correctly
Even family employment needs proper payroll. You’ll need:
An Employer Identification Number (EIN)
Withholding for income tax, Social Security, and Medicare, where applicable
Filing of Form W‑2 at year‑end so your child’s earned income is documented
3. Enjoy Tax Benefits for Unincorporated Businesses
If your business is a sole proprietorship or partnership, and your child is under 18, both you and your child can skip Social Security and Medicare taxes. Plus, paying your child a reasonable wage means you get a deductible business expense that lowers your taxable income. Bonus tip: encourage them to open a Roth IRA, using their income now for tax‑free retirement growth later.
4. Know Child Labor Law Restrictions
Your child's job tasks, work hours, and even work schedules may be limited. Child labor laws protect their health, schooling, and safety. Always follow these rules closely to avoid penalties.
5. Keep Accurate Documentation
Good records are essential. Track:
Employment dates
Hours worked
Wages paid
Taxes withheld
It’s your protection during IRS audits or any inquiries from labor departments.
6. Don’t Forget the Tax Forms
File Form W‑2 for wages of $600 or more in a year
If you withhold taxes, file Form 941 quarterly
File Form 940 annually if you meet wage thresholds
These filings show compliance and support your business deductions.
7. Use Income Shifting to Unlock Savings
This strategy moves income from your higher tax bracket to your child's lower bracket, and you both benefit. Your child gets money they can save or invest and even contribute to a Roth IRA, while your business claims legitimate deductions.
8. Check Your Business Structure
If you're a sole proprietor or parent‑only partnership, payroll tax breaks are available. But in a C-corporation or S-corporation, taxes apply fully to both payroll and the company. Still, income-shifting and IRA benefits may outweigh the cost.
9. Why You Should Consult a Tax Professional
This is great for tax savings, but rules can be tricky. A tax advisor helps you set up payroll correctly, comply with child labor laws, and ensure you're not overpaying on payroll taxes.
In Summary
Hiring your child in your business can be a rewarding experience that builds skills and provides tax perks. If you follow payroll best practices and stay compliant with labor rules, your business gains and your family grows together.
Disclaimer: This post offers general information only. For advice on your situation, consult a qualified tax or labor law professional.
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