What Your CPA Wants You to Know
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What Your CPA Wants You to Know
98. Kids on Payroll: The Legal Tax Hack to Save Taxes Every Year!
Paying your children through your business is a legitimate and powerful tax strategy that can save you thousands every year!
• Reduce taxes by converting business income into deductible expenses with zero tax impact
• Children earning under $15,000 (2025 standard deduction) pay no income tax and don't need to file returns
• Sole proprietors (Schedule C) and farms (Schedule F) don't pay payroll taxes on wages to children
• S-corporations must pay payroll taxes, but strategy remains beneficial for 22%+ tax brackets
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Yeah. So if you're a sole proprietor or you file your business on Schedule C of your 1040, this is a really great tax strategy for you to use, because you do not have to pay payroll taxes.
Speaker 2:Welcome to what your CPA Wants you To Know.
Speaker 1:Tax and accounting help can be expensive, so we've created this podcast to help guide you through it all and make you feel like you have a CPA in your back pocket.
Speaker 2:I'm Carson Sands.
Speaker 1:And I'm Taryn Sands.
Speaker 2:I'm a CPA with over 10 years of experience helping people start and grow their businesses.
Speaker 1:And I'm an MBA with a specialization in marketing and entrepreneurship. Taxes suck and we want to make sure you don't pay more than your fair share.
Speaker 2:We're here to share everything your CPA wants you to know.
Speaker 1:In a fun and easy to understand way.
Speaker 2:Let's get started.
Speaker 1:Let's do it. Welcome back to the podcast today, Carson. It's our first episode since tax season ended.
Speaker 2:What is a podcast?
Speaker 1:Yeah, that's about how we're both feeling right now. It's all so nice for it to be over, but it's also not really over, because we have a lot more tax returns to do.
Speaker 2:Three or four at least.
Speaker 1:We do have quite a long list, but I guess what it really means is that we're not going to work weekends anymore and we're going to just end at a normal time. And then you know, we have until October to get all of that filed. So it does give a little bit of a break, because Carson's been working seven days a week for a bunch of weeks now, which is why he also can't form very many words at once.
Speaker 2:Three or four.
Speaker 1:You're really going to have to talk more on this podcast. Okay, I'll try.
Speaker 1:He also doesn't know what we're talking about today, so let me enlighten you and all the listeners. We are going to talk about something that we talked a lot about with clients this tax season, and the question was can I really pay my kids through my business? And if you didn't know, the answer is yes, absolutely you can and you should. So this episode is going to be all about why that is a good tax strategy and how you can do it in your business. So, carson, why don't you start us off by first telling us why should you pay your kids through your business? How does that help you reduce the amount of taxes that you will pay?
Speaker 2:Well, it can help a lot because your kid's income tax rate is probably zero. If they make less than $15,000 for 2025, their income tax rate is definitely 0% and, depending on what kind of business you have, you may not even have to pay payroll taxes on the money that you pay them. So this is a way of almost just making income disappear, but legally.
Speaker 1:So, to make it a little simpler, you will pay them from your business, which means that is an expense for your business. So that is going to reduce what you're paying taxes on. But the best part is you're not going to pay taxes on what you actually paid, because the person receiving it your child does not have to file a tax return if they make less than standard deduction, which, like Carson said, is $15,000 for 2025. So if you pay them out of your business, that amount, and they don't even have to do anything, which is nice they don't have to pay taxes on it, they don't have to file a tax return. So it's kind of like a win-win.
Speaker 2:It's great actually, and now one of the things you have to remember is that they do actually need to be working for you, so find something that is age appropriate for them to do.
Speaker 1:Okay, you're getting a little ahead of me, but now that we know why we should do this to help lower taxes then we'll get into a little bit more of the nitty gritty and the IRS rules with that. But pretty much every business owner should be doing this If you are trying to really get rid of some of that income and decrease your taxes. It's definitely easier if you're a business like ours or it's just us two and we're like, yeah, let's pay all three of the kids and you know, help with taxes. So it can get a little trickier, I know, with businesses that have multiple owners, like how you're going to work this out, but for the most part it's very easy if you're doing it with a sole proprietor or if you are in business with your husband or something, or you could probably work it out with your partner if you both wanted to pay a child from the business.
Speaker 2:That can get tricky if you have a different number of children or different ages of children making it to where you know the amount you can pay them is different, so that can be problematic.
Speaker 1:And that makes me think. A lot of people have also asked like do you have to pay all of them? What's a good rule of thumb for how much? How old do they have to be? We're gonna kind of hit on all of those. But yeah, if you worked out something with your partner where you're both just paying one kid, I mean that can help reduce the tax system and you can, you know, maybe not necessarily be even as far as if they had three kids and you have two or something, but you definitely could talk about it and work something out. But the very first step is to figure out what your child can do in your business. And I know sometimes that can get a little tricky, like asking us, for instance, what can kids do in our business? And it's not necessarily accounting. So that could be helping clean the office, scanning papers, cleaning that type of thing around the office, and filing or shredding documents.
Speaker 2:Kids love to use the shredder.
Speaker 1:Yes, so little things like that. And if you're thinking about it in terms of if you're trying to pay them the max so right at $15,000, then it's not really a significant amount of money that you're paying each month if they were to help you out a few hours every day after school or something like that. So let's get into a little bit more of the fine details of this, and one of those is just making sure they're doing legitimate work. Like we said filing papers, it could be social media, help cleaning your office, packaging, product modeling for your brand. There are so many things they could be helpful with. You just must make sure that it's age appropriate and necessary for your type of business.
Speaker 2:And having a single picture of your family on your Facebook page is probably not going to cut it. You're going to need to get a little bit more creative than that.
Speaker 1:And that leads me to just explain that that's not anything that you're submitting with the IRS, like with your tax return or anything. That's just something that, if they were to audit you, you would need to have all of these things we're going to talk about in place to make sure that you're proving that it's legitimate and that you're allowed to do the things that you're doing. So, as far as filing your tax return, you need none of that, but we're going to talk about some of the things to just make sure you have in place so that if, for some reason, they were to audit you or ask you about it, you could provide it, which is not very likely. So the second thing that they say is that you need a reasonable wage.
Speaker 2:Now there's a lot of states where the minimum wage is already on its way to being $15 an hour. So I mean, if you think about it, to hit 15,000, uh, then you, they would need to work a thousand hours for the year, which is less than a hundred hours a month, um, which is about, you know, 15 to 20 hours a week. So, depending on what they're doing, how old they are and how complicated the work they're doing is, that can vary. You know a great deal on how much you pay them.
Speaker 1:Right, this just means.
Speaker 2:Say, if you have a 16 year old that's doing all of your social media marketing, I mean they could easily be making $15,000 a year. If you have a five year old that's sweeping your office, it might be hard to do the full 15,000 and you know, have it be legitimate unless you're really making your five year old work.
Speaker 1:You know 15 to 20 hours a week unless you're really making your five-year-old work, you know, 15 to 20 hours a week, which is pretty unlikely, right, you don't want to be paying them $100 an hour to file paperwork or staple. It needs to be a reasonable wage. But also, once again, like I said before, there's not really any direct like you have to pay them this much, or this person that is five years old can only make this much. It's really up to your discretion. So, like with clients, I know Carson usually just tells them like look, you should probably not pay your five-year-old as much as you're paying a much older kid that is able to do more work.
Speaker 2:But there are exceptions to that. If you have an online clothing boutique, let's say, and you have a five-year-old and your target market is children's clothing, Well, I mean, if you have your five-year-old modeling those clothes a lot, then you know modeling is more than $15 an hour. Child models get paid 25 to $50 an hour. That's pretty standard. So they wouldn't have to work a thousand hours a month to reach that limit, you know. I mean they could easily be working a total of four or 500 hours for the year and with taking pictures of all the different clothes and everything, and you could definitely justify $15,000, even for a five-year-old in that circumstance. But if you have a excavation company, it might be harder to make that claim.
Speaker 1:Absolutely. It just all really depends on your situation and there's not direct guidelines on like people always want like an exact number and we just can't give them that because that's not how it on. Like people always want like an exact number and we just can't give them that because that's not how it's laid out by the.
Speaker 2:IRS Right.
Speaker 1:So you can see how this could add up, definitely to save you taxes, especially if, like us, we have three kids. If we were paying all of our children $15,000, and that would be $45,000 of expenses we get to use in our business but not income that we have to pay taxes on.
Speaker 2:We don't do that. We don't do all $15,000. I think we will. One day We'll have them all put to work, but you know we do have a five-year-old.
Speaker 1:Yeah, she's not quite there yet.
Speaker 2:She's not quite worth $15,000 a year yet.
Speaker 1:But you can see how it would really add up. But you can see how it would really add up and it's completely legal, so many people use this. It's definitely a great way to get your kids involved in your business and also save some taxes. So the next step on this just to make it all legitimate and what the IRS wants you to do is to create a job description for them, just like you would any other employee in your business. It does not have to be crazy Just write something down on a sheet of paper. This is what their job is and this is what they're doing, so their tasks, how often they work and what you're paying them.
Speaker 2:Just like any employee. Again, what do they get paid per hour? How many hours did they work? It's real simple. You just need to keep track of it.
Speaker 1:Just keep that on hand, because that's documentation that the IRS may ask you for. Once again, you do not have to submit this to anyone unless you're ever asked for it. Then the next step would be to actually pay them. So if you are an S-corp, like us and you already have payroll going, that is super simple to add them to payroll and you can do that through QuickBooks or Gusto or however you're running payroll Super simple, you just have to put in once again how much you're going to be paying them and let it start paying them whenever you're ready.
Speaker 2:So whether it's an S-corp or not is important, because if you have a sole proprietorship, for example, which could be a Schedule C business or a Schedule F farm, then whenever you pay your kids, you don't have to pay payroll taxes, and neither do they as long as you are the 100% owner of this business, and so that's an even bigger benefit.
Speaker 2:If you're paying them out of a business like that, you can also get a benefit from paying them out of your S-Corp, but you do have to pay the Social Security and Medicare taxes, which are also called payroll taxes, on those kids. And so if you are in the 10 or 12% income tax bracket, it actually doesn't make sense to pay your kids because you're paying 15.3% in payroll taxes to have them on payroll. But if you're in the 22% or higher tax bracket, it does make sense because you're saving, whatever your income tax rate is 22% or more, and you're only having to pay out 15.3%. But, as you can see, that's a huge difference compared to the sole proprietorship or the farm, which is able to deduct that payroll expense and not pay any payroll taxes. So, no matter what your income tax bracket is, that's beneficial for you.
Speaker 1:Yeah. So if you're a sole proprietor or you file your business on Schedule C of your 1040, this is a really great tax strategy for you to use, because you do not have to pay payroll taxes. Now, the biggest part of this is actually paying them, and this is where we get the most questions and I think, maybe because it sounds too good to be true, that's why we get questions about it. But so you're paying them from your business and you set it up. Let's say, you set up a direct deposit. Does it have to go?
Speaker 2:into their account, like what are the rules around that money actually going to them? They are minors, so you're completely in control of this money. It can go into a checking account that you use to pay for all of their many, many sports related expenses. The food that they eat, even contributing to household bills. They live in the house, they eat the food, they use the electricity. Those are all fine options if you need that money to live off of.
Speaker 1:And a lot of people do. They're saying well, I can't afford to pay my child and that's whenever we address this issue is that you can put it into your personal account. So when that paycheck goes through, it would just be transferred to your account and just use it as you would any other funds that you receive from the business, so you do not have to put in an account in their name, you do not have to let them spend it. It is still your money. Now, if you are in the position where you're trying to lower your taxes and you have a lot of extra income you're trying to get rid of, but you don't necessarily need that money, we do have some things that we recommend that you could do with the money, but just make sure that you know that you do not have to put this money in a child's account or give them this money. So what are some other things that people could do with the money that you recommend if they're not looking to keep it themselves?
Speaker 2:Well, you can put up to $7,000 a year into a Roth IRA for them. So they have to be earning at least $7,000 or more for you to do that. But if you're paying them up to the $15,000 maximum we recommend, then, yeah, put 7,000 of it into a Roth IRA, starting it when they're teenagers. You would not believe the amount of compound interest they'll have and that money that $7,000 will be. I mean, it will be worth 12 to 15 times that amount of money by the time they're at retirement age. So that's one option. Now another option would be putting it into a college savings account, whether it's an ESA or a 529 plan. That's another great place to put that money and you're in complete control of it again. So you can put it there to make sure that they have money for college and they're kind of earning it themselves.
Speaker 1:Yeah, so it's a win-win Either way, whatever you choose to do with it, you can use it for school or summer camps or groceries, or you could set them up for retirement or some sort of school plan using that money. There's really no rules on what you use it once you pay them.
Speaker 2:Or force them to put in a savings account that they use to buy their car with and pay for their insurance and gas on that car out of that, I mean, it's really up to you.
Speaker 1:Yeah, you absolutely can set them up accounts and then have the money go into that account, so it's really all up to you on that part. Now the final step in all of this is just to track it like a real expense, just like anything else in your business. So whenever that transaction comes up in your bookkeeping, make sure that you're categorizing that as payroll and just treating it like an actual, real expense.
Speaker 2:In QuickBooks payroll, for example. If, again, if you're an S-corp, then you just put them in as a normal employee. But if you are a Schedule C business or a Schedule F business, then there's a way to set up an employee to mark a box in QuickBooks to indicate that they're exempt from Social Security and Medicare taxes. You do that to make sure that they don't withhold that money, because then you don't get it back. If the payroll system takes that money out and pays it in, you're not going to get it back, but you didn't even have to pay it in the first place. So make sure, if you are a sole proprietorship, that you set that up properly and reach out to your tax professional if you need help with that.
Speaker 1:So to summarize this episode, the IRS says, yes, you can pay your kids as long as it's real work, it's a reasonable amount of pay and you document it properly. So many people use this. We recommend it to everyone. It's not. I guess some people like think that it's like too gray of an area. It's not. People use this all the time.
Speaker 2:Are they afraid they're going to have to actually give it to their kids, to just let them buy whatever they feel like? And that's not really the case. Even if they go work for McDonald's, they're not in complete control of that money. You are still in control of that money as long as they're a minor, so it's the same thing if they work for you.
Speaker 1:And this also is not a tax strategy that you have to be super wealthy millionaire to use. Actually, it benefits you way more if you're a sole proprietor. So so many people listening to this podcast can definitely take advantage of this, starting in 2025. So I know it sounds like a lot of steps to do, but if you have a payroll program, you can get that set up through them or add it to your QuickBooks. Just make sure you're checking the correct options, like Carson said, so that you're not paying those taxes if you don't have to.
Speaker 2:And if I mean just think, if you're in the 22% tax bracket, which is a pretty medium level tax bracket, you could be saving up to $3,000 per kid or more just by doing this.
Speaker 1:Well, that's all we have for you today. Thanks so much for listening. If you learned something today, will you please share this episode with a friend or a fellow business owner, because that's how this podcast grows. And until next time, thank you so much for listening to.
Speaker 2:What your CPA Wants you To Know.
Speaker 1:Podcast.
Speaker 2:This podcast is intended to provide accounting and tax information for educational purposes only. All tax situations are unique and should be handled with the assistance of a tax professional.