If you have children under the age of 18 that you can employ to do work in your business, you can not only teach them some valuable lessons about work and money management, but you can take a great tax deduction that can benefit you in several ways. Not only can you deduct the wages paid to your child, you also do not have to pay FICA and Medicare taxes on those payments like you would adult employees. You are also exempt from having to pay unemployment taxes on their wages. Since they can earn up to the standard deduction before having to pay any income taxes, you can pay them several thousands of dollars a year in wages and it will be tax deductible to you and tax free to them.
In order to take this deduction, you need two things:
1. Documentation of the work they did and the time spent doing it (if you choose to pay them hourly) and a documented paper trail of actually having paid them the money.
2. You need to be efficiently documenting the details of what they did and the hours worked to accurately record their employment. You can produce a child wage report you will need to verify these wages. Keep an accurate paper trail.
An important note to deducting child wages: The MOST you can pay a child employee (under the age of 18) is up to the STANDARD DEDUCTION amount, which is dependent on your filing status, before they have to file taxes of their own. Please verify the standard deduction on the federal tax rates chart. Be aware that any other source of payment your child receives throughout the year will increase the child’s total income.
Consult a tax professional to see if this deduction fits your circumstances.
This is not to be taken as tax advice.