If you have a business, or if you’re thinking about starting one, there are several ways you can use that business to help you save money on your taxes. For example, one little-known strategy that can provide significant tax benefits is employing your children. 

This article explores the various tax benefits of paying your kids from your business and how it can help reduce your overall tax burden. From saving on payroll taxes to shifting your income to a lower tax bracket, employing your children can be a wise financial move.

Shift your income to a lower tax bracket

When you pay your child from your business, you’re effectively shifting income from your higher tax bracket to your child’s lower tax bracket. Specifically, if your child is in a lower tax bracket than you, you can reduce income taxes using this strategy. While this technically increases the tax liability for your child, this strategy can effectively reduce the overall tax liability for your family as a whole.

Save on payroll taxes

If your business is a sole proprietorship or a partnership in which both partners are the child’s parents, you can save on payroll taxes. In this case, the child’s wages are exempt from Social Security and Medicare taxes (FICA) until they turn 18. This exemption provides an additional tax savings benefit because not only do you reduce income tax but you also eliminate payroll taxes on the wages paid.

Benefit from a standard deduction

Each taxpayer is entitled to a standard deduction, which reduces the amount of income subject to income tax. For 2023, the standard deduction for a single individual goes up $900 to $13,850!  By employing your child, you enable them to use their standard deduction against their earned income, effectively making a portion of their wages tax-free. This can further reduce your family’s overall tax liability. 

For example, if you only pay your child $13,850, they will pay no income tax because they will take full advantage of the standard deduction. If you are in the 37% bracket, this amounts to over $5,000 in tax savings.

Deduct business expenses

When you employ your child in your business, you can deduct their wages as a business expense. This can help reduce your business’s taxable income and lower your tax liability.

Teach valuable life skills

While not a direct tax benefit, employing your kids in your business can teach them valuable life skills, such as work ethics, financial responsibility, and time management. These skills can benefit them throughout their lives, making this strategy an investment in their future. For example, I really enjoy teaching my children the value of a dollar earned.

What’s the catch?

While this sounds like a great strategy, make sure you dot your i’s and cross your t’s. Specifically, you must document the work performed and be able to show that the work was necessary for the business. Additionally, you must document the amounts paid and be able to justify them as reasonable for the services they perform.

Conclusion

Paying your kids from your business can provide numerous tax benefits to help you save on taxes. From income shifting to payroll tax savings, the advantages of this strategy are material. Additionally, employing your children allows you to invest in their future by teaching valuable life skills and setting them up for long-term financial success. 

As with all tax strategies, it is important that you keep robust documentation, and it is highly recommended that you work with a tax professional/CPA to ensure all the correct income tax and payroll tax forms are properly completed and filed. If properly executed, this strategy can pay dividends to your family for years to come.