Small Business Tax Deductions: 3 Keys to Hiring Your Children in Your Small Business

Have you ever wondered whether hiring your child to work in your small business is a legitimate business practice? Yes, it is perfectly legal to put your son or daughter on the payroll. This is a great tax deduction for many family-owned and family-operated small businesses, and the resulting tax savings can be substantial.

For this tax-saving strategy to work, however, you must be careful to follow to the following guidelines:

1. The child must actually perform the work for which he/she is paid.
If your child is old enough (and responsible enough) to do chores around the house, then he/she is probably old enough to work for your business. If they help clean the house you live in, they can clean the office building you work in. They can vacuum the carpets, empty the trash cans, dust the furniture, and make those restroom fixtures shine!

Can they read and write? Then they can do many clerical office tasks such as filing and basic record keeping. Can they use a computer? Here’s an area where they may know more than you do. So put your computer whiz to work and have him maintain your website.

If your business provides labor services such as lawn care, and your children are big enough and strong enough, put them on the crew. I’m sure you can think of plenty of other tasks. Be creative, within the limits of reasonableness.

The key here is this: the child must be paid for actual work. No funny money, ok?

2. The compensation must be reasonable.
Again, you are hiring your child and treating him/her like any other employee. This must be a true arm’s length transaction. You pay the child the fair market value for services rendered. Do not inflate the wage. Pay your child the same hourly rate as you do other employees who are doing comparable work. If you hire the child to do work that no other employee is doing, find out what the current rate is for that type of work in your geographical area.  Again, no monkey business here.

3. The work done by the child must be necessary for the business.  In other words, if your child did not do the work for which they were paid, the business would have had to hire someone else to do it.

These guidelines are merely common sense, aren’t they?  Simply put, your child must be treated like any other bona fide employee.

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4 Responses to Small Business Tax Deductions: 3 Keys to Hiring Your Children in Your Small Business

  1. Jose says:

    Does this work when you are a s corp?
    parents are the only corporate officers

    • Wayne Davies says:

      Yes! This strategy works for any type of entity: S Corporation, C Corporation, partnership, limited liability company, sole proprietorship. Thanks for asking.

  2. Does this also apply to grandchildren?

    • Wayne Davies says:

      Yes. Any family member can be an employee of the business, provided they do legitimate work and are treated like a bona fide employee.

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