Updated: Aug 25, 2021
How can you make your children work for you and receive a tax write-off?
Having your own business is as taxing as having children. You have to nurture it, build it and make it grow for it to operate without you exerting much effort. It is indeed challenging, but having it with your children is on another level.
Did you know that you can actually take advantage of that situation? You can actually put your children on payroll and receive tax write-off for their salaries! Yes, you heard it right. Current tax regulations allow you to treat the amount you pay for your children as fully deductible and legitimate business expenses. This in turn will lower your gross income subjected to taxes—a great way to cut additional expenses in the future. Ironic to say but you incur to save!
In order to properly qualify for this deduction, you must fulfill the below requirements:
Make sure that your children are doing legitimate work for your business. They should be doing activities or tasks that are directly contributing to the operations of the business. Also, since this rule doesn’t apply any age limit, you have to make sure that the tasks are age-appropriate! You may refer to DOL Rules regarding labor for the youth.
Wages you are paying to your children must be reasonable. You cannot pay your 10-year old son $12,000 for tax-related or logistical roles. Definitely this might be reviewed by the tax authorities and can be disregarded for being unrealistic. You may give your children realistic and simple jobs such as office sanitation, equipment care, simple encoding, general errands and many more.
Keep recorded documentation of your children’s job activities. This is necessary for possible scrutiny of the IRS.
You have to ensure that paying your children (in any terms) is also similar to how you pay your other employees. Basically, there should be no special treatment. This will strengthen their ground as real employees in your company.
The way it works is quite simple. We have a standard deduction that a regular taxpayer may apply to his or her earnings. The amount is $12,400. If you planned to pay your children the same amount annually, then basically, your children would not need to file a tax return. Aside from that, since this payroll expense can fall as a tax-deductible business expense, your business is still legitimate to take a deduction. Truly a way to save for your business and your children’s future!
This is definitely a way to build your business in terms of human resources, and at the same time improve your relationship with your children. This will also teach your children the importance of entrepreneurship, accountability and responsibility.