Mixet | E+ | Getty Images
If you’re self-employed, you may receive tax benefits when you employ children, experts say, as long as you follow labor laws and IRS rules.
Small businesses hiring their own children is a popular topic among social media influencers on TikTok, Instagram, YouTube, and more. But tax experts say they often battle misinformation from such posts.
“Most of the videos on TikTok contain a kernel of truth, but they are either dramatized or only make sense in very specific circumstances,” says Rochester, New York-based registered agent MDM Financial. Services owner Matt Metras previously told CNBC.
Personal Finance Details:
This retirement account could offer teens 3x tax benefits this summer
Economist says 20% down payment is ‘absolutely not necessary’ to buy a home
Elizabeth Warren wants student loan borrowers to know bankruptcy is now easier
“But a 60-second video doesn’t try to convey that nuance,” Metras said.
According to financial experts, there are some important things to know if you plan on hiring your child this summer.
Employing children can result in tax savings
“Employing your child can be a tax-smart move,” says Sean Robison, a certified financial planner and founder of Purpose Built Financial Services in the Philadelphia area. “Their wages can be deducted as an expense, which can lead to significant savings for small businesses.”
The federal standard deduction for single filers in 2024 is $14,600.
“If the child’s income is within the limits, he or she may not have to pay income tax, which could be a win-win,” said Lovison, who is also a certified public accountant.
Additionally, depending on the child’s age and legal business structure, payments to the child may avoid Medicare and Social Security taxes, according to the IRS.
If your child’s income is within the limits, he or she may not have to pay income tax, which can be a win-win.
Sean Robison
Founder of Dedicated Financial Services
Once children earn “income,” or wages from employment, they can contribute to a Roth individual retirement account, which can be powerful for young savers, experts say.
Children have a triple tax benefit, said CFP Carol Fabbri, managing partner of Fair Advisors in Conifer, Colorado. Children typically pay little tax on contributions, no taxes on growth, and no taxes on withdrawals in retirement. .
“It’s never too early to get into the habit of saving,” she added.
However, you need to be aware of the 2024 contribution limit, which is the lesser of your child’s gross income or $7,000.
What you need to know before hiring a child
Experts say it’s important to know state and federal labor and tax laws before hiring children.
“Some states pretty much prohibit hiring children under the age of 14 under any circumstances,” Lovison said.
If employed, the children must do actual work for the business and their remuneration must be reasonable commensurate with their duties.
“Record-keeping is non-negotiable,” Robison said. “Not only will this help you understand your tax situation, but it can also serve as a valuable resource if questions arise regarding your child’s employment.”
According to the IRS, payments made to children are subject to withholding regardless of the child’s age. “You can cover the basics” by hiring your children as W-2 employees and withholding taxes, but if you take less than the standard deduction, you’ll get a full refund of the taxes you paid, Lovison said.
