The Strategy

The hire-your-child strategy works best for a Schedule C proprietorship because when the proprietor hires his or her under-age-18 child, the tax code exempts both the child and the proprietorship from payroll taxes. 

That’s great for proprietorship owners who have children under age 18. But if you hire your child and operate as a corporation or your child is age 18 or older, both you and the child suffer payroll taxes. 

This strategy can allow you to avoid payroll taxes on children over age 18 and on children doing work for your corporation. 

Let’s say that you are in the 40 percent federal bracket and you pay your 20-year-old child college student $23,225:

• You deduct the $23,225 in your high tax bracket, thus saving $9,290 on your taxes.
• Your child only pays $1,028 in taxes.

Think of it this way: the family unit (you and your child) are in the green by $8,262 ($9,290 - $1,028). 

How To Implement This Strategy

If you contract with your child to perform a one-time task such as build your business a website, create several business videos, install office windows, or paint the office or building, your child is not in a trade or business. 

Also, that one-time task is not likely to make your child an employee. Make sure you don’t cross the line and make your child an employee- more on that later.

And since this is not a trade or business and only a for-profit endeavor, you don’t want your child to incur any expenses, because the Tax Cuts and Jobs Act disallows for tax years 2018-2025 miscellaneous itemized deductions subject to the 2 percent of adjusted gross income floor.

If you need windows installed, your best bet is to have your business buy the windows and installation material. 

However, if your child were to buy these supplies and materials, it’s likely that they could deduct them as a cost of sales. But that creates paperwork for the child and possible disagreeable discussions with the IRS.

A Possible Catch

Earlier in this article we mentioned that you must be careful not to make your child an employee. Here are three points that will keep your child as an independent contractor:

• Be careful not to have your W-2 employees doing similar work as your independent contractors.
• If you are paying any independent contractors more than $600 yearly, give them 1099s and file those 1099s with the IRS properly and on time. Then the IRS will find consistent treatment of independent contractors on your tax returns.
• Have proof of a reasonable basis for treating your child as an independent contractor.

Would you like to discuss other possible strategies to increase your deductions? Click here to schedule an appointment with one of Gold Standard's seasoned tax accountants.

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