best way to pay children working for my small business

[TheBeeKeeper]

my kids (15 and 12) do some work for my small business, mostly in the summer.
My business is tiny and makes about 15-20K net a year. No employees, and it's an LLC taxed as a sole proprietor.
The kids could make 500-1,000$ each working during the summer, maybe a bit more with some work throughout the year.

I suppose making them employees would be an overkill for such a small income? Would it make sense to hire them as contractors?

[SeattleCPA]

This is a GREAT idea. One of the best small business tax loopholes available.

The amounts you pay are a deduction for business... the income is income tax free and payroll tax free for minor children.

More info: Hiring Your Children as a Tax Loophole...

[CareCPA]

You should check out the most recent MMM post ;)

[G-dog]

Watch out that the job responsibilities align with and regulations and laws so you don’t accidentally get in trouble under labor laws.  Usually safety is a concern.

[SwordGuy]

If you set up a 401K plan with a big contribution for all employees, you can pay them a lot that's tax free for them (and you).

(But double-check that with a CPA just to be sure...)

[SeattleCPA]

You should check out the most recent MMM post ;)

The MMM blog post that Chris provides expertise in... Should We Employ Our Own Kids

P.S. Good work Chris!

[SeattleCPA]

If you set up a 401K plan with a big contribution for all employees, you can pay them a lot that's tax free for them (and you).

(But double-check that with a CPA just to be sure...)

Just because it's a little nuanced, let me say that if a sole proprietorship or a partnership where the two parents are the partners pays minor children, that income isn't subject to federal payroll taxes and usually isn't subject to federal income taxes either.

E.g., if a sole proprietor with two kids earns, say, $24,000 before paying the kids but then pays each kid $12K, the $12K isn't subject to federal income taxes because the $12K standard deduction shelters that income.

Further, if the two kids are minors, Social Security taxes, Medicare taxes and FUTA taxes don't apply.

One needs to check whether state or local payroll taxes or income taxes apply, but usually hiring minor children in a sole proprietorship or a husband and wife partnership is a killer tax saving gambit.

And two clarifications. One, you don't want to pay kids as 1099 contractors, you pay them as W-2 employees. Two, and as discussed in more detail in the blog post I earlier referenced, the job needs to be real.

[CareCPA]

If you set up a 401K plan with a big contribution for all employees, you can pay them a lot that's tax free for them (and you).

(But double-check that with a CPA just to be sure...)

Just because it's a little nuanced, let me say that if a sole proprietorship or a partnership where the two parents are the partners pays minor children, that income isn't subject to federal payroll taxes and usually isn't subject to federal income taxes either.

E.g., if a sole proprietor with two kids earns, say, $24,000 before paying the kids but then pays each kid $12K, the $12K isn't subject to federal income taxes because the $12K standard deduction shelters that income.

Further, if the two kids are minors, Social Security taxes, Medicare taxes and FUTA taxes don't apply.

One needs to check whether state or local payroll taxes or income taxes apply, but usually hiring minor children in a sole proprietorship or a husband and wife partnership is a killer tax saving gambit.

And two clarifications. One, you don't want to pay kids as 1099 contractors, you pay them as W-2 employees. Two, and as discussed in more detail in the blog post I earlier referenced, the job needs to be real.

So this begs the question: if I set my firm up as an LLC taxed as an S Corp, how do we funnel money through a Sole Prop to pay the kids in the most tax-advantaged way? I'm guessing chunk the business down into discrete portions and run through separate entities (just like splitting it up for 199A purposes).

Just a thought exercise of course.

[SeattleCPA]

If you set up a 401K plan with a big contribution for all employees, you can pay them a lot that's tax free for them (and you).

(But double-check that with a CPA just to be sure...)

Just because it's a little nuanced, let me say that if a sole proprietorship or a partnership where the two parents are the partners pays minor children, that income isn't subject to federal payroll taxes and usually isn't subject to federal income taxes either.

SNIP

So this begs the question: if I set my firm up as an LLC taxed as an S Corp, how do we funnel money through a Sole Prop to pay the kids in the most tax-advantaged way? I'm guessing chunk the business down into discrete portions and run through separate entities (just like splitting it up for 199A purposes).

Just a thought exercise of course.

That's interesting to ponder... FWIW, what I've usually felt is this "employing minor children" angle becomes a factor in some cases when you're advising on choice of entity.

And so the practical choice is between the S corp route... or the sole proprietorship route... but not both.

I have defended minor children salaries a few times for clients and in my experiences it's something where the optics need to look good and the job really, really, really needs to be arms-length, common-sensed, etc.

[Fishindude]

Pay them an hourly wage via check so they get familiar with the way an employer / employee relationship works and what their time is worth.   Also, the check forces them to learn a little about doing their own banking.