Employing Your Children

If you own a business and can employ your children, you may realize several tax advantages. First, your child's wages are fully deductible as a business expense. And, if you are a sole proprietor or a partner in a partnership in which you and your spouse are the only partners, you won't have to pay FICA on those wages if the child is under age 18, nor will you have to pay unemployment insurance if the child is under age 21.

Also, your child's wages may be subject to a lower tax rate than if you were to retain the same money as business earnings. In 2019, children with earned income pay a modest 10% tax rate on the first $9,700 and 12% on the next $29,775.

Finally, in 2019, a child with earned income receives a standard deduction of up to $12,200 and may qualify for an IRA deduction of $6,000 — totaling $18,200 free from Federal income tax.

Children may also be partners in partnerships or shareholders in S corporations, which may reduce the overall family tax burden in certain situations.