It can be rewarding and fun to hire your children as employees in your business. Along with the other benefits of working for a family business, having children work for the business offers tax advantages. However, there are certain considerations you must address when hiring your children to work in your small business, including Social Security Tax/Medicare Tax.
Make sure that your child is providing age-appropriate work and paid accordingly. In other words, you can't hire your 8-year-old to be your bookkeeper; your child must be paid appropriately for the work they do. In other words, if your child is doing work that you would normally pay $10 an hour to have performed, the IRS expects you to pay your child accordingly and will check on the pay rate. All hours and work must be documented and be business related. You must issue paychecks and W-2 forms to your children.
If your small business hires your children to work in the business, there are tax benefits if the children are not yet 18 years of age. You can pay your child for the work done without having to withhold Social Security/Medicare or unemployment taxes. This saves you money and also allows your children to keep more of their earnings.
If you hire your children to work in your business, you can open an individual retirement account for each child. In addition to being able to put money away without any tax liability, it also allows the business owner to add to the savings account. An IRA lets the child withdraw the money early if needed, but also has the advantages of being tax-free if the child waits until he is ready to retire before withdrawing from the account.
If you hire your child -- although you might not have to pay Social Security/Medicare or unemployment taxes -- your child is still responsible for income tax withholding.
Even though your child is your family member, he must fill out the same employment forms all other employees do. In the event a financial audit takes place, having the right documentation available saves time and helps avoid any fines or penalties.