The Absolute Best Tax Deduction for Small Businesses: Hiring Your Kids
If you have a business, then you are likely missing out on a goldmine of benefits and tax deductions. Let me ask you: do you have kids? Do they help out? Do you pay them? If so, they should be your employees!
To be honest, I didn’t figure this goldmine out until our kids were teens and I’m still kicking myself for not hiring them sooner. This is because every cent I paid them I could have written off as a business expense. It wasn’t until I only had a few years left that it dawned on me that I could do this.
Before hiring them, I had already been paying them for years. It was usually with gift cards, extra toys, fast food, or plain cash. But none of it was official, so I lost out on many years’ worth of tax deductions.
So don’t make the mistake I did. If you have a business, hire your kids now!
Why I Didn’t Hire Them Sooner – Probably Your Reasons Too
I’ve heard all the excuses. Every small business owner I have interviewed or spoken to over the years repeats these to me. Tell me if you’ve heard these, or if you are thinking them right now as you read this.
I was too busy to bother. Actually, my employed kids saved me far more time than if I hadn’t hired them.
I didn’t think it would help my bottom line much. Boy was I wrong.
I didn’t think my kids would benefit much either. Again, what a mistake to think so.
I thought that it would create a red flag on my tax returns. It didn’t.
I thought it was going to be difficult, with lots of paperwork and more stuff that I would have to manage. After a little online research, I found out it was all pretty easy.
There is a ton of information online about hiring your kids and like all online sources, not all of it is useful, while much of it is a sales pitch. In the end, the good info gets lost in the junk. The more I researched it myself, the more I became demoralized.
So instead of providing links to all the info I’m going to share how I hired my kids. I believe the best way to learn is by following the examples of others more so than what they tell you. Many online sources are also rather general, and they may not mean much to your specific business. For those reasons, examples are better than lectures.
Let’s address each concern, in order. But before I do, let me add a quick disclaimer:
It goes without saying that each family business is different. Tax questions can become complicated. I am not a tax advisor or an accountant, I am only describing the decisions I made for my specific business. Please consult with your own accountant to make sure you manage deductions, and your business tax returns properly. Much of this stuff was way over my head too, so I relied on professionals for advice, and some of that I am sharing below.
Being Too Busy
We are all busy, and I was running my own business as well as assisting with three other businesses when I started this. It turns out that when you are being pulled into different directions, one of the best things you can do is hire someone to take over one of these directions for you.
So that’s what I did. I “assigned” one of my big projects to one of my kids. I knew it would be more than they could handle, but I would be there to guide and train. To my surprise, my son took the task by the horns. He taught himself new skills, he took initiative, and he alleviated something that was more of a burden when I was doing it all myself.
The important thing is to trust that your kids are resourceful and smart. More often than not, they will rise to the challenge, much in the same way a non-family employee might. They might even see things you may miss and actually improve things for the better – youthful eyes have advantages.
Now this isn’t always the case, but if your kids have already been working in the business by “helping out” they undoubtedly already have the experience they need to step into the job. What I found is that my kids saved me time once I trusted them with more responsibility – whether it was designing a new website or packing products for shipping.
I was able to grow the business significantly as a result of these time savings. I sold more products and provided more services as a result of having the extra help. Since my kids had already learned so much from the business before I formally hired them, I also did not need to spend time training them. The training I did provide was above and beyond what they had done before.
Photo by Kenny Eliason on Unsplash
Helping My Bottom Line
As I mentioned before, I was already paying my kids before I hired them. While this is an important factor, I think this is not uncommon with small family-owned businesses. Once I officially hired them, I had a deductible expense that I could claim on my taxes that same year: their wages. So, for example, if I paid each child $3500 that year, this is $7000 in income that I could deduct from my taxable profits.
Of course, this only makes sense if the labor that your children do also generates more income. For me, it absolutely did. One single account that I added that year was worth half of my labor expenses. I also increased product sales significantly that year. This would not have been possible without their hard work in making that happen.
There are other benefits you should consider that make hiring one’s children better than hiring non-family members. Because they are your children, your business is not subject to social security, Medicare, or unemployment taxes – that’s right, you don’t have to pay FICA or FUTA. This reduces expenses and paperwork.
If you think about it, this makes perfect sense because, as your children, they typically fall under your insurance. While you do have to purchase Worker’s Compensation Insurance, which we did through our business insurance provider, this is fairly straightforward. I literally did this over the phone with my agent in a few minutes and it was not a significant additional expense.
Other than the software I used to manage their payroll (more on that below), there were no other expenses. So, at the end of the year, it was considerably less expensive than hiring employees who were not family members.
Oh, I almost forgot, I also was able to deduct an online Microsoft training course that the kids completed, as well as the required safety equipment I bought for them. I’m sure there were other deductions specific to the kids, but I can’t recall them off the top of my head. Anyhow, it’s all deductible.
The bottom line was that I was already paying my kids before I officially hired them. So, when I did, I was then able to deduct their salaries too. On top of that, I was able to deduct any expenses related to their work as well.
Photo by Kaboompics.com on Pexels
How Hired Kids Benefit
While the benefits to our bottom line were already clear, the real shock came in the many ways this benefitted the kids. First of all, they received valuable training in working for a small business. More than before, they were now invested in its success and I believe this really made a difference in the quality of the work.
Yet that only scratched the surface.
They were now officially earning income. As a result, they learned about money management, credit cards, checking accounts, doing their own taxes, as well as investing. While they could have learned much of this in a classroom because they were doing it with their own money, there was a sense of ownership, an investment in their own financial health, which meant so much more.
Speaking of taxes, they paid none on their income, because they did not earn enough to be taxed. As of 2024, that threshold is $14,600 per year, and they didn’t exceed that. Now I realize that some of you run larger businesses and your kids may exceed that, but they will likely still be in a lower tax bracket than most other employees because they only work part-time.
But wait, there’s more (I’m starting to sound like a Shamwow commercial). I also set the kids up with personal retirement accounts that their paychecks automatically funded. There are many investment options for this. Because they are official employees, they can have a traditional 401k, a personal IRA, as well as education investment accounts like Coverdells or 529 plans. According to IRS guidelines, up to $6,500 of their earnings can be put into such accounts each year.
Because these investments are directly deducted from their paychecks, this can further reduce their taxes, even if they earn more than the threshold of $14,600. If they don’t earn that much, that pre-tax deduction is nice to have on their returns too. I opted for a 529 plan for each kid and had my stock broker manage this for me, but that is an extra expense, of course. Alternatively, you can set this up on your own too.
One more detail that applied to us directly. My kids used Turbo Tax to do their taxes – a great learning opportunity, by the way. Because their taxes were relatively simple, the Turbo Tax services were completely free. Doing taxes is not free for me, unfortunately, because my taxes are a bit more complex, lol.
Hiring Your Kids Does Not Create a Red Flag
As with most small business owners, my taxes are always at the forefront of my mind. That is why I use an accountant. When I was discussing hiring my kids, my accountant was not concerned at all. As a matter of fact, he said many of his clients do this and he asked why I had waited so long. Hmm, Ok.
But I wondered if this would generate extra scrutiny by the IRS and the state tax services. While he acknowledged that it does add complexity to the returns, he assured me that this is common enough that it shouldn’t raise any red flags. As a matter of fact, if done properly and consistently each year, it shows that the business is growing and progressing well.
Now that I’ve had my kids working for the business for a couple of years, I can say that I have not noticed any additional scrutiny. What I have noticed are all the benefits, and those cannot be understated. The fact is that the benefits far outweigh those risks.
Hiring Kids is Easier Than You Think
One of the biggest hurdles that small business owners have when they hear that they should hire their kids is that they don’t even know where to begin. I had the same concerns so I did a ton of research and settled on one product that has made the whole process very easy. It’s not free, but considering how much of the heavy lifting they do, I can’t imagine having done it without them.
So, as soon as you finish reading this article, you should head on over to Gusto.com:
Now, this is my referral link, so I am compensated a little bit for referring people, but hear me out. I signed up as a Gusto referring customer because I am such a big fan of the service. I researched dozens of alternatives before deciding on Gusto and nothing is as easy, as convenient, and as well-reviewed. Go ahead and do your own research if you don’t believe me; I’m certain you’ll come back to Gusto every time.
As I said, it’s not free. It costs $40 a month + $6 a month per employee, and here in California, I also had to register with the state, something Gusto automated for me, but there was a one-time charge of $200. Yes, I know, the up-front cost was a bit of a shock to me too. Some of the other companies I had looked at charged less for these things, but they also had fewer features and a lot more complexity.
What really convinced me, though, is how Gusto made everything so simple and easy. I didn’t have to submit anything to the IRS, the State, or anyone else. Gusto did everything for me. My business bank account and my accounting software plugged right into Gusto. My accountant, too, was onboarded in one step.
Speaking of onboarding, Gusto sent all the necessary info to my kids’ email addresses, so hiring them was a breeze as well. It synched with their TurboTax accounts, and it sends them the required W-2 forms for their taxes every year. Every month I do their payroll, and I’m done.
I mentioned above that I set up 529 educational plans for my kids with an outside stockbroker. However, Gusto also has an option to do this internally without a broker. For a small fee, they can set up any tax-deferred investment plan, all integrated with their service. It is very convenient to have this all managed in a single interface.
While this is a bit outside of the scope of this article, Gusto can be a great resource for later too. For example, if you decide to maintain your children as employees after they turn 18, Gusto will handle all the extra paperwork and tax reporting for you. Also, Gusto will manage outside contractors who provide services for your business and handle the 1099 paperwork for you automatically. I’ve used it to manage my contractors on occasion as well.
So, is Gusto worth $52 a month (for two employees)? Well, for me, it definitely is. All the paperwork I would be responsible for would add substantially to my workload, and now I don’t have to do anything – well, other than monthly payroll. I’ve set up Gusto for clients I work with and they rave about the improvement over what they were using before. This tells me that I made the right choice for my business. If you need a hassle-free way to hire your kids, then Gusto is the way to go.
Conclusion
As I mentioned above, there are many online sources with advice about hiring your kids – just Google it. I neglected to do this for years until my kids were much older. This means that I missed out on a huge opportunity for additional tax deductions. If you are already paying your kids, or compensating them in some other way, then you should really consider hiring them.
I do realize that every business is different. It may not make sense for every family business to hire their kids, and I understand that. However, if you are still on the fence about this, you should also consider the other benefits I mentioned.
After hiring my kids, they became much more dedicated employees. This allowed me to grow the business and increase profits. In the process, the business is now better established, and more stable and this attracts more clients/customers. Of course, the extra cash flow also goes back to my kids as well. They have more income with their own investments, and this benefits us all.
