Putting Your Child on the Payroll

Volume 1 Issue 2007

If you are the owner of a small business or are a self-employed professional, you may want to consider employing your child in your business or practice. Not only can you help your youngster earn some money, as well as gain valuable work experience, but you may also be able to reap some significant tax benefits for your family.

Potential Tax Savings

For starters, you can deduct wages paid to your child, and there will be no federal income-tax liability on up to $5,350 (in 2007) of the child’s earnings, due to his or her use of the standard deduction. This assumes, of course, that the amount you pay is reasonable for the duties actually performed.

Also, if you are self-employed, you eliminate self-employment tax on the income. In addition, there will be no Social Security, Medicare, or federal unemployment tax (FUTA) liability on your child’s wages if he or she is under the age of 18 (the FUTA exemption applies until age 21).

More Money for the Family

Income your child earns over and above the standard deduction amount will be taxable at your child’s income-tax rate. As your own marginal tax bracket is probably much higher, the extra funds earned by your child could result in valuable family tax savings.