Are you a business owner that reports business income and expenses on Schedule C of your form 1040? There is a special opportunity to reduce their income and self-employment taxes.
Suppose you, the owner, have some minor children that can work in the business. If you keep the records of when they worked, how many hours and how business related their work was, then you have a possible expense deduction if you pay the children before the end of the year. (You still have time to hire your kids and pay them before the end of 2023. Maybe you need help counting inventory, deep cleaning your business, etc.?)
You don’t have to pay the children each week or even each month. If they are paid in the calendar year, it counts. If you pay by check, you may have to go to the bank with them to get the check cashed. You might want to help them set up a savings account.
Proper documentation is very important. Describe the work they do in detail. With cell phone cameras, get a few pictures of them working. Remember, you can only pay them what you would have paid an unrelated employee.
There have been some court cases where the taxpayer was audited by IRS and the deduction for wages paid the children was the issue. Most cases were won by the taxpayer, if they had good records and the amounts paid to the children were fair and reasonable (what would have been paid to an unrelated worker).
There is a special provision that applies to sole owner businesses. If you are the owner of a business that reports on Schedule C, then there is no requirement to withhold Social Security or Medicare taxes out of their wages. Thus, paying your children will reduce your profits, income tax and self-employment tax, and help them start a lifelong savings habit as well as learn the important lesson of hard work and its rewards.
If your business is a corporation (regular “C” or “S”) or a partnership, it is still OK to hire your children and pay them for their work. Make sure your child has a W-4 form (they will need your help filling it out) that indicates they don’t need any income tax withheld from their wages. Your child will need to file an income tax return and check the box that they are a dependent on another return.
Have you heard? Psalms 127:3-5 says, “Behold, children are a heritage of Yahweh. The fruit of the womb is his reward. As arrows in the hand of a mighty man, so are the children of youth. Happy is the man who has his quiver full of them.”