When you’re self-employed, you’ve got a lot of responsibilities to juggle. It’s not unusual to ask for help from family members — and that might even include your kids. But have you ever considered paying them for the work they do? Not only is it possible, but it could have tax benefits for you as a self-employed taxpayer.
If you do decide to put your child(ren) on payroll, it will impact your tax situation and theirs. Here’s what you need to know:
Can I pay my child to work for me without getting in trouble with the IRS?
Yes, you can hire your child to work for you. There is no minimum age someone has to be before they can earn a salary. To make sure you are compliant with the IRS:
- Choose a job that is appropriate for their age. Don’t hire your toddler to do your accounting.
- Pay them fairly. How much would you offer anyone else to do the same job? That’s what you should pay your child.
- Keep track of the hours they work and the type of job they do for your tax records.
- Write out a contract outlining their responsibilities. The duties you give your child should only be related to your business–not personal services, like housework or mowing the lawn at home.
- Fill out IRS Form W-4 and complete U.S. Citizenship and Immigration Services (USCIS) Form I-9, Employment Eligibility Verification.
Can I write off paying my child as a business expense?
You can deduct your child’s wages as a business expense as long as the pay is reasonable and the job they do is necessary. (See the list above for more details about what is reasonable and necessary).
How much can I pay my child tax free in 2021?
Your child can earn a maximum of $12,550 without owing income tax*.
If you are a sole proprietor or have a partnership with your spouse and your child is age 17 or younger, the IRS says you don’t need to pay Social Security or Medicare, or FUTA (unemployment) tax on their wages. But you do need to withhold income tax no matter how old you child is.
Note: Your child’s wages are subject to Social Security, Medicare, and FUTA tax if:
- You are in a partnership with someone other than your spouse
- Your business is a corporation
- They work for an estate (even if the estate belongs to a deceased parent)
* $12,550 is the standard deduction amount for a single filer in 2021. You are still expected to withhold income tax from your child’s wages during the year, but they can file a return and claim a refund for taxes paid.
Does my child need to file their own tax return if they work for me?
It depends on how much income they earn. If your dependent is age 17 or younger and earned more than $12,550 of income in 2021, they will need to file a personal income tax return. If they earned less than $12,550, they may still want to file anyway, because they could be owed a tax refund.
Should I give my child a 1099 or a W-2 tax form?
As a rule of thumb, you should issue a W-2 to anyone who works for your business and is classified as an employee. This includes your child.
If your child is over age 18 and you’ve decided to treat them like an independent contractor for tax purposes, you’ll need to give them a 1099-NEC (if you’ve paid them $600 or more). Treating your child like an independent contractor means you are not withholding income tax from their paycheck, and you are not paying the employer’s share of Social Security and Medicare. (Instead, they would be responsible for self-employment tax.)
It also means that you do not manage them or their work directly. Misclassifying an employee as an independent contractor could have consequences for you as a business owner. Learn how to correctly classify independent contractors and employees.
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This article is up to date for tax year 2021 (returns filed in 2022).