Tax Saving Tip: Adding Your Children to Payroll

If you own a business and have children, you might be missing out on a powerful tax-saving opportunity. In this episode, Greg Reed, Head of Tax at SmartBooks, breaks down how to hire your kids in a way that’s legal, smart, and financially beneficial.

When you hire your kids and pay them a reasonable wage for real work, you shift income from your higher tax bracket to their potentially zero percent bracket. If you pay your child up to the standard deduction (currently $12,200), that income is tax-free to them. You still get to claim them as a dependent and receive the child tax credit.

This strategy lets you reduce your taxable income while keeping the money within your household.

What to Know Before You Hire Your Kids

Before you jump in, there are a few things to consider. First, your kids must perform real, age-appropriate work. This could be anything from filing papers to helping with marketing or cleaning the office.

Second, the type of business entity you operate matters. If you’re a sole proprietor or an LLC taxed as a sole proprietorship, you won’t have to withhold Social Security or Medicare taxes when you hire your kids under 18. However, this rule does not apply to corporations or partnerships where one of the partners is not a parent.

You’ll also need to follow proper payroll procedures—just like you would with any other employee. This includes documenting hours, issuing paychecks, and filing the appropriate tax forms.

Why Hiring Your Kids Is a Smart Move

Many business owners overlook this strategy because they assume it’s complicated or risky. But with the right setup and guidance, hiring your children can reduce your tax burden and teach them valuable life and financial skills.

Greg emphasizes the importance of documentation and compliance. When done correctly, you’ll be able to show the IRS that your kids are legitimate employees and that the wages paid are reasonable.

Final Thoughts

If you’re a business owner with kids, now is the time to explore how to hire your kids and reduce your tax liability. It’s a rare win-win: you save on taxes and teach your children the value of work.

Need help determining if this strategy fits your business? Contact SmartBooks today and get expert advice tailored to your situation.