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Employing Your Child In Your Family Business or Farm

Hiring your child in your family business or farmFamily tax planning often includes strategies to shift income to children to take advantage of their lower tax rates.

One technique that small business owners and farmers can use to reduce self-employment tax is to employ children in the family business.

Many family-run businesses allow their children to help out in one way or another.

Employing your child in your business is a great way to instill a good work ethic and provide them with some spending money.  However, they must actually do some work if you want to get a business deduction for their wages.

That means they’ll have to actually break a sweat cleaning your warehouse or shoveling out the animal pens and they may even have to learn to respect and take orders from your other employees!

Considerations:

  • The compensation paid must be reasonable for the work performed
  • You must keep records documenting the type of work they performed and the amount of time they worked
  • Child labor provisions may limit the hours that children can work and define certain industries where additional limits and prohibitions apply
  • Most family farms are exempt from minimum age and hour requirements
  • This does not apply to businesses organized as corporations, partnerships where there are partners other than the child’s parents, or an estate or trust
  • Federal minimum hourly wage and overtime laws apply

Benefits:

  • Wages paid to a child under age 18 from a parent’s sole proprietorship/farm or partnership (where parents are the only partners) are NOT subject to FICA (Social Security and Medicare) taxes
  • Wages paid to children under 21 may be exempt from Federal Unemployment tax
  • The business/farm can deduct the wages as business expenses, reducing self-employment tax to the parent(s)
  • The child may use the wages to buy clothing or other necessary supplies, thus reducing the parent(s) otherwise non-deductible personal expenses
  • The child will have earned income which may be used to fund an IRA
  • Children age 18 (or 19-23 and full-time students) can avoid “kiddie tax” (i.e. part of their investment income being taxed at the parents’ rate) if their earned income is more than half of their support
  • A child earning up to $5,950 with no income from other sources will have no federal income tax liability

Potential Drawbacks:

  • The child cannot be claimed as a dependent if their wages are in excess of one-half the child’s support
  • The child may be required to file a separate income tax return
  • The IRS may scrutinize whether the income was reasonable for the work actually performed
  • The business/farm will have payroll reporting requirements (if they formerly had no employees)
  • Wages are subject to Federal withholding (will be refunded if child has no tax liability)

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