1 Mistake to Avoid When Hiring Your Kids in Your Business

Running a small business comes with plenty of perks, including hiring your kids and reaping some tax benefits.

It sounds like a win-win, right? Your child gets some hands-on experience, and you get a tax deduction. But here’s the thing — if you don’t do it correctly, you could end up in a tax mess instead of a tax advantage.

I’ve been in this business for over a decade, and I’ve seen a lot of small business owners make mistakes when it comes to hiring their kids. Some are misinformed by so-called “professionals,” while others try to figure it out on their own and unknowingly get it wrong. Today, I want to walk you through one of the biggest mistakes I see and what you need to do instead to make sure you’re truly benefiting from this tax strategy: paying your kids as independent contractors.

The Biggest Mistake When Hiring Your Kids: Paying Them as Independent Contractors

One of the most common errors small business owners make is putting their kids on payroll — but paying them as independent contractors instead of employees.

Here’s why that’s a problem: when you issue your child a 1099-NEC at the end of the year, you’re not actually saving any money. Instead, you’re creating an extra tax burden for them.

If your child is classified as an independent contractor, they’ll have to file their own tax return and report that 1099 income as self-employment income. That means they’re on the hook for self-employment taxes — 15.3% for Social Security and Medicare. Plus, since they likely don’t have any business expenses to deduct, they’ll also have to pay ordinary income taxes on top of that. Yikes!

So, instead of this being a tax-saving move, it’s actually costing more in taxes and completely defeating the purpose of hiring your kids in the first place.

Hiring Your Kids the Right Way

If you’re serious about making this a legitimate and beneficial tax strategy, your kids must be treated as employees. Here’s what that means:

• They must be on payroll. Pay them as W-2 employees, not 1099 contractors.

• Taxes must be withheld and remitted properly. Your business needs to handle payroll tax forms correctly.

• Their role must be age-appropriate. You can’t just put them on payroll for the sake of tax savings. They need to be doing actual, legitimate work for your business.

Important Guidelines to Keep in Mind

If your child is under 18, there are some key tax advantages to hiring them — but only if done correctly.

FICA Tax Exemption:If you file as a sole proprietor and hire your child under 18, you don’t have to withhold Social Security and Medicare taxes (FICA). This can save a lot on payroll taxes. However, this benefit doesn’t apply if your business is an S-corp or C-corp.

Age Matters:I once had a client try to put their two-month-old on payroll — nice try, but that’s pushing it! The youngest court-tested case for hiring a child is seven years old. A safe rule of thumb is to wait until your child is at least six or seven and make sure they have legitimate tasks suited for their age.

The Work Must Be Real:Your child’s role in your business needs to be genuine. Think simple yet valuable jobs like filing papers, cleaning the office, helping with social media, or organizing supplies. The IRS can (and will) question payments made to kids who aren’t actually doing any work.

Pay Must Be Reasonable:Your child’s compensation should align with what you’d pay someone else for the same work. You can’t pay them an inflated salary just to shift income to them for tax savings.

More Than Just Tax Savings

While tax benefits are a great incentive, hiring your kids is also an excellent opportunity to introduce them to business and financial responsibility. When kids are involved in your business, they learn firsthand what it takes to be an entrepreneur. They get an early education in managing money, understanding work ethic, and building valuable skills.

I truly believe that everyone should have some level of business knowledge, even if they don’t want to be an entrepreneur. Growing up in an entrepreneurial environment benefited me tremendously, and it can do the same for your kids.

Need Help Setting It Up the Right Way?

If hiring your kids is a strategy you’d like to implement but you’re not sure where to start, I’m here to help. I’ve guided countless clients through this process, ensuring that their kids have legitimate roles, are paid appropriately, and that everything is structured correctly to maximize tax savings. Book a call with us and let’s chat about how we can make it happen for you!

Disclaimer: This article is not meant to be tax advice. This is not an all-inclusive list of business advice. Different rules may apply to each individual taxpayer’s specific situation. Please consult with your accountant. May contain affiliate links