$12,000 Child Work Deduction

When it comes to running a business, there are many ways to save money and maximize your profits. One way to do this is by hiring your child to work in your business. However, if you want to take a tax deduction for the wages you pay your child, there are certain rules and limitations that you need to be aware of.

First and foremost, it’s important to understand that if you hire your child to work in your business, you must pay them a reasonable wage for the work they perform. You cannot simply pay your child a large sum of money without them actually doing any work in your business. This is considered tax fraud and can result in serious penalties.

Assuming you pay your child a reasonable wage for the work they perform, you can take a child employment tax deduction for the wages you pay them. However, the amount of the deduction is limited to $12,000 per year.

This $12,000 limit is a result of the Kiddie Tax, which is a tax law that was put in place to prevent parents from shifting income to their children in order to take advantage of their lower tax rates. Under this law, any unearned income (such as investment income) that your child earns above a certain threshold is taxed at your marginal tax rate. For 2021, this threshold is $2,200.

If your child has earned income from working in your business, this income is considered earned income, and is not subject to the Kiddie Tax. However, the IRS limits the amount of the child employment tax deduction you can take for this earned income to $12,000 per year.

It’s also important to note that if you hire your child to work in your business, you must treat them like any other employee. This means you need to keep accurate records of the hours they work, the tasks they perform, and the wages you pay them. You also need to comply with all applicable labor laws, such as minimum wage and overtime requirements.

To summarize, if you hire your child to work in your business, you can take a tax deduction for the wages you pay them, but this deduction is limited to $12,000 per year. To take advantage of this hire-your-child tax strategy, you must pay your child a reasonable wage for the work they perform, and treat them like any other employee. If you have any questions or concerns about hiring your child to work in your business, it’s always best to consult with a tax professional.