Everything You Need To Know About How To Pay Your Child From Your Business
One of the advantages of operating your own business is hiring family members. -IRS
Do you have your own business? Do you have children? If the answer is yes then you can hire your kids and save on taxes.
How To Properly Hire Your Kids – You Must Be Careful.
If you make your child an employee and add them to payroll then you will miss out on the tax advantages. This means you do not make your children W2 employees. If you make your child an employee then you will need to report self-employment income. Even if the child is not subject to income tax, self-employment income is subject to self-employment tax.
How does my child avoid self-employment tax?
If your business is a sole-proprietorship or partnership then your children under 18 are not subject to social security and Medicare taxes. If you children are under 21 years old they are not subject to Federal Unemployment (FUTA) tax.
What if my business is not a sole-proprietorship or partnership?
If your business is a corporation or an estate, basically, a separate entity, then your child is subject to social security taxes, Medicare Taxes, and FUTA taxes. But wait, there is still a workaround to hire your kids.
How To Pay Your Kids if You Have a Corporation.
Since your child is subject to self-employment taxes if paid by a corporation, they cannot be paid directly. This is where a family management company comes in. A family management company is a generic term for your sole-proprietorship (sole-prop). Your sole-prop is created by you and performs services for your corporation and then bills your corporation for services rendered. The kids perform the services for the corporation and the the family management company pay the kids. Since the family management company is a sole-proprietorship the payment to the children is not subject payroll taxes.
How Do I Create a Family Management Company?
- Choose a name for your family management company. It should follow theme of offering contract services for a corporation, ex. Smith Business Services, ABC Office Management, Etc.
- File a DBA (Doing Business As) or FBN (Fictitious Business Name) with the county recorder of the county in which your business is located.
- Obtain a separate Taxpayer ID if you don’t want to use your personal Social Security Number (OPTIONAL).
- Open a business bank account.
- Invoice your corporation for services rendered.
- Pay your children from the family management company for services performed.
- Your corporation will issue a 1099 to your family management company.
How Much Can I Pay My Child to Work For My Business in 2023?
Even I you are able to avoid self-employment taxes, your child still may be subject to income tax. However, if you pay your child less than the standard deduction then your child is not subject to income taxes or filing a a tax return.
The sweet spot is to pay your kid near, but not over, the standard deduction limit.
The 2023 standard deduction is $13,850. This means if your family management company pays your child less than $13,850 they don’t have to file a federal tax return. However, the standard deduction for states is often less. In California, for example, the 2023 standard deduction is $5,202. This means if you pay your child more than the state standard deduction, your child will still need to file a state return. If you live in a state with no income tax then you only need to pay attention to the federal standard deduction.
We Can Guide You To Set Up Your Family Management Company and Pay Your Kids Properly
Reference material: https://www.irs.gov/businesses/small-businesses-self-employed/family-help
