Encore Partners
  • About Us
    • Who We Are
    • Client Testimonials
    • Careers
  • Services
  • Insight
  • Contact
  • Client Payments
  • Client Portal
  • Menu Menu

Tax advantages of hiring your child at your small business

April 8, 2021/in News, Tax Tips - Business/by Betty Kim

As a business owner, you should be aware that you can save family income and payroll taxes by putting your child on the payroll.

Here are some considerations. 

Shifting business earnings

You can turn some of your high-taxed income into tax-free or low-taxed income by shifting some business earnings to a child as wages for services performed. In order for your business to deduct the wages as a business expense, the work done by the child must be legitimate and the child’s salary must be reasonable.

For example, suppose you’re a sole proprietor in the 37% tax bracket. You hire your 16-year-old son to help with office work full-time in the summer and part-time in the fall. He earns $10,000 during the year (and doesn’t have other earnings). You can save $3,700 (37% of $10,000) in income taxes at no tax cost to your son, who can use his $12,550 standard deduction for 2021 to shelter his earnings.

Family taxes are cut even if your son’s earnings exceed his standard deduction. That’s because the unsheltered earnings will be taxed to him beginning at a 10% rate, instead of being taxed at your higher rate.

Income tax withholding

Your business likely will have to withhold federal income taxes on your child’s wages. Usually, an employee can claim exempt status if he or she had no federal income tax liability for last year and expects to have none this year.

However, exemption from withholding can’t be claimed if: 1) the employee’s income exceeds $1,100 for 2021 (and includes more than $350 of unearned income), and 2) the employee can be claimed as a dependent on someone else’s return.

Keep in mind that your child probably will get a refund for part or all of the withheld tax when filing a return for the year.

Social Security tax savings  

If your business isn’t incorporated, you can also save some Social Security tax by shifting some of your earnings to your child. That’s because services performed by a child under age 18 while employed by a parent isn’t considered employment for FICA tax purposes.

A similar but more liberal exemption applies for FUTA (unemployment) tax, which exempts earnings paid to a child under age 21 employed by a parent. The FICA and FUTA exemptions also apply if a child is employed by a partnership consisting only of his or her parents.

Note: There’s no FICA or FUTA exemption for employing a child if your business is incorporated or is a partnership that includes non-parent partners. However, there’s no extra cost to your business if you’re paying a child for work you’d pay someone else to do.

Retirement benefits

Your business also may be able to provide your child with retirement savings, depending on your plan and how it defines qualifying employees. For example, if you have a SEP plan, a contribution can be made for the child up to 25% of his or her earnings (not to exceed $58,000 for 2021).

Contact us if you have any questions about these rules in your situation. Keep in mind that some of the rules about employing children may change from year to year and may require your income-shifting strategies to change too.

Tags: Small Business Tax
Share this entry
  • Share on Facebook
  • Share on X
  • Share on LinkedIn
  • Share by Mail
https://encorepartnersllp.com/wp-content/uploads/2021/04/Family-Business.png 292 560 Betty Kim https://encorepartnersllp.com/wp-content/uploads/2021/02/Logo_hex2-1030x266.png Betty Kim2021-04-08 08:00:002021-04-09 14:45:18Tax advantages of hiring your child at your small business
You might also like
Ways to manage the limit on the business interest expense deduction
Hiring independent contractors? Make sure you’re doing it right
Cash or accrual accounting: What’s best for tax purposes?
CalSavers Mandate Compliance – Don’t Wait Until the Deadline
Taking your spouse on a business trip? Can you write off the costs?
How can you build a golden nest egg if you’re self-employed?

Newsletter Signup

Connect With Us

  • Facebook
  • LinkedIn
  • Twitter

Categories

  • Encore Culture
  • Events
  • News
  • Tax Tips – Business
  • Tax Tips – Individual

Search

Recent Posts

  • Spousal IRAs: A smart retirement strategy for couplesJuly 9, 2025 - 3:34 pm
  • Milestone moments: How age affects certain tax provisionsJuly 2, 2025 - 3:16 pm
  • Is college financial aid taxable? A crash course for familiesJune 24, 2025 - 2:44 pm
  • The advantages of a living trust for your estate planJune 5, 2025 - 12:04 pm

Get the latest tax and finance news

right in your inbox


Encore Partners Logo
  • Email
  • Facebook
  • LinkedIn
  • Twitter

Main Office
4350 Executive Drive
Suite 260
San Diego, CA 92121
858.549.7100

Beverly Hills Office
9465 Wilshire Blvd,
Suite 300
Beverly Hills, CA 90212
310.300.8480

© Encore Partners LLP 2024 – all rights reserved

site design by digitalstoryteller.io

© Encore Partners LLP 2024 – all rights reserved
site design by digitalstoryteller.io

Income tax deadline is extended, but estimated tax payment is still due on April...Why it’s important to meet the tax return filing and payment deadlines Scroll to top

This site uses cookies. By continuing to browse the site, you are agreeing to our use of cookies.

Accept All CookiesRefuse Cookies

Cookie and Privacy Settings



How we use cookies

We may request cookies to be set on your device. We use cookies to let us know when you visit our websites, how you interact with us, to enrich your user experience, and to customize your relationship with our website.

Click on the different category headings to find out more. You can also change some of your preferences. Note that blocking some types of cookies may impact your experience on our websites and the services we are able to offer.

Essential Website Cookies

These cookies are strictly necessary to provide you with services available through our website and to use some of its features.

Because these cookies are strictly necessary to deliver the website, refusing them will have impact how our site functions. You always can block or delete cookies by changing your browser settings and force blocking all cookies on this website. But this will always prompt you to accept/refuse cookies when revisiting our site.

We fully respect if you want to refuse cookies but to avoid asking you again and again kindly allow us to store a cookie for that. You are free to opt out any time or opt in for other cookies to get a better experience. If you refuse cookies we will remove all set cookies in our domain.

We provide you with a list of stored cookies on your computer in our domain so you can check what we stored. Due to security reasons we are not able to show or modify cookies from other domains. You can check these in your browser security settings.

Google Analytics Cookies

These cookies collect information that is used either in aggregate form to help us understand how our website is being used or how effective our marketing campaigns are, or to help us customize our website and application for you in order to enhance your experience.

If you do not want that we track your visit to our site you can disable tracking in your browser here:

Other external services

We also use different external services like Google Webfonts, Google Maps, and external Video providers. Since these providers may collect personal data like your IP address we allow you to block them here. Please be aware that this might heavily reduce the functionality and appearance of our site. Changes will take effect once you reload the page.

Google Webfont Settings:

Google Map Settings:

Google reCaptcha Settings:

Vimeo and Youtube video embeds:

Other cookies

The following cookies are also needed - You can choose if you want to allow them:

Privacy Policy

You can read about our cookies and privacy settings in detail on our Privacy Policy Page.

Accept settingsHide notification only