Did you know you can hire your kids as legitimate employees and save money on taxes at the same time? Grab a seat. This is not a drill.
Being a parent is already a tough enough job. Add being an insurance agency owner to that, and you're lucky if you're still sane and haven't pulled your hair out. Luckily there are some tax benefits you can take advantage of when you hire your kids. This is, of course, on top of the benefit that you get to spend more time with them and set them up for success in the professional world. It's just a bonus that when done correctly, you could save thousands of your dollars in taxes.
Without further ado, here is how you can save money on taxes by hiring your kids.
As an insurance agency business owner, you're generally set up as a Sole Proprietor, an S-Corp or an LLC. Each entity type gets different tax advantages when it comes to hiring your kids. For example, if you operate as a corporation or a partnership with someone other than your legal spouse, the advantage you’ll see is being able to write off your children’s salaries on your corporate tax return - in the same fashion you do your other employees' wages.
Please note, regardless of how your agency is set up, there are no tax benefits if your children are over the age of 21.
The tax benefits of hiring your children
We're finally here! You can legally avoid most taxes on the wages you’re paying your children if your agency is a sole proprietorship, a partnership where both owners/partners are spouses, or an LLC that has elected to be treated as either a sole proprietorship or a partnership. As you can see, the tax savings of hiring your kids is one of the advantages of having a family business.
There are even more benefits if your child is under 18 years old because their wages are exempt from:
- Social Security tax
- Medicare tax
- Federal unemployment (FUTA) tax
Once they turn 18, you (the agency owner) and they will have to start paying Social Security and Medicare. However, they will still be exempt from FUTA until they turn 21.
Not to mention, you will be able deduct their salaries as a business expense, thereby reducing your taxable income.
But wait there's more: due to the new standard deduction, the first $12,550 your child makes is entirely exempt from taxes. How come? The standard deduction that the IRS gives taxpayers reduces taxable income dollar-for-dollar up to $12,550 for those filing single.
Here's the tax-free trifecta for you and your child:
- They're under 18 years of age
- It's part-time gig
- You're paying them less than $1,000 a month
This will save you thousands each year. Even if your kid's income crosses that $12,550 threshold, their tax bracket is likely lower than yours, which means you're still reducing your family’s taxable income.
How to employ your kid without getting in trouble
The IRS knows there is a huge benefit in doing this, so it's paramount their employment is set up properly to reap these benefits.
Here are some best practices when employing your children:
- They must be an actual employee doing work that's necessary for your agency (i.e help around the office, cleaning, clerical work, etc). They don’t have to be doing the most important tasks to run your agency, but you can’t give them a made-up job just to pay them or have them do personal chores in exchange for a salary.
- Your child must be seven years old or older to be considered a valuable employee. Your child also has to be old enough to perform useful services for your agency. Yes, that means you can’t hire your newborn for the tax break.
- Your kid's compensation must be relative to the work they’re performing. A good rule of thumb to follow if to pay them the same amount of money that you’d pay any employee for the work they’re performing.
- Add them to payroll
- Help them fill out Form W-4 and the Employment Eligibility Verification (Form I-9).
- File Form W-2 for them at the end of the year. (Depending on your payroll company - they will do this for you automatically).
- If you’re paying them hourly, have them fill out timesheets - again treat them in the same fashion you'd treat a regular employee.
Again, hiring your children is an excellent way to bond with them, prepare them for the professional world AND get some tax benefits. As a reminder, this post is for informational purposes only and should not be taken as tax or legal advice. Every agency is different. To find out if it's beneficial or not for you to hire your kids, please speak to your tax accountant or book a tax planning call with us if you're already a tax client.