April 30, 2025 • 17 mins
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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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
Yeah.
So if you're a sole proprietoror you file your business on
Schedule C of your 1040, this isa really great tax strategy for
you to use, because you do nothave to pay payroll taxes.
Speaker 2 (00:17):
Welcome to what your CPA Wants you To Know.
Speaker 1 (00:20):
Tax and accounting help can be expensive, so we've
created this podcast to helpguide you through it all and
make you feel like you have aCPA in your back pocket.
Speaker 2 (00:31):
I'm Carson Sands.
Speaker 1 (00:32):
And I'm Taryn Sands.
Speaker 2 (00:34):
I'm a CPA with over 10 years of experience helping
people start and grow theirbusinesses.
Speaker 1 (00:39):
And I'm an MBA with a specialization in marketing and
entrepreneurship.
Taxes suck and we want to makesure you don't pay more than
your fair share.
Speaker 2 (00:49):
We're here to share everything your CPA wants you to
know.
Speaker 1 (00:53):
In a fun and easy to understand way.
Speaker 2 (00:56):
Let's get started.
Speaker 1 (00:58):
Let's do it.
Welcome back to the podcasttoday, Carson.
It's our first episode sincetax season ended.
Speaker 2 (01:08):
What is a podcast?
Speaker 1 (01:12):
Yeah, that's about how we're both feeling right now
.
It's all so nice for it to beover, but it's also not really
over, because we have a lot moretax returns to do.
Speaker 2 (01:22):
Three or four at least.
Speaker 1 (01:23):
We do have quite a long list, but I guess what it
really means is that we're notgoing to work weekends anymore
and we're going to just end at anormal time.
And then you know, we haveuntil October to get all of that
filed.
So it does give a little bit ofa break, because Carson's been
working seven days a week for abunch of weeks now, which is why
he also can't form very manywords at once.
Speaker 2 (01:44):
Three or four.
Speaker 1 (01:45):
You're really going to have to talk more on this
podcast.
Okay, I'll try.
He also doesn't know what we'retalking about today, so let me
enlighten you and all thelisteners.
We are going to talk aboutsomething that we talked a lot
about with clients this taxseason, and the question was can
I really pay my kids through mybusiness?
And if you didn't know, theanswer is yes, absolutely you
(02:06):
can and you should.
So this episode is going to beall about why that is a good tax
strategy and how you can do itin your business.
So, carson, why don't you startus off by first telling us why
should you pay your kids throughyour business?
How does that help you reducethe amount of taxes that you
will pay?
Speaker 2 (02:25):
Well, it can help a lot because your kid's income
tax rate is probably zero.
If they make less than $15,000for 2025, their income tax rate
is definitely 0% and, dependingon what kind of business you
have, you may not even have topay payroll taxes on the money
that you pay them.
So this is a way of almost justmaking income disappear, but
legally.
Speaker 1 (02:45):
So, to make it a little simpler, you will pay
them from your business, whichmeans that is an expense for
your business.
So that is going to reduce whatyou're paying taxes on.
But the best part is you're notgoing to pay taxes on what you
actually paid, because theperson receiving it your child
does not have to file a taxreturn if they make less than
(03:07):
standard deduction, which, likeCarson said, is $15,000 for 2025
.
So if you pay them out of yourbusiness, 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'thave to file a tax return.
So it's kind of like a win-win.
Speaker 2 (03:22):
It's great actually, and now one of the things you
have to remember is that they doactually need to be working for
you, so find something that isage appropriate for them to do.
Speaker 1 (03:31):
Okay, you're getting a little ahead of me, but now
that we know why we should dothis to help lower taxes then
we'll get into a little bit moreof the nitty gritty and the IRS
rules with that.
But pretty much every businessowner should be doing this If
you are trying to really get ridof some of that income and
decrease your taxes.
It's definitely easier ifyou're a business like ours or
(03:52):
it's just us two and we're like,yeah, let's pay all three of
the kids and you know, help withtaxes.
So it can get a little trickier, I know, with businesses that
have multiple owners, like howyou're going to work this out,
but for the most part it's veryeasy if you're doing it with a
sole proprietor or if you are inbusiness with your husband or
something, or you could probablywork it out with your partner
if you both wanted to pay achild from the business.
Speaker 2 (04:14):
That can get tricky if you have a different number
of children or different ages ofchildren making it to where you
know the amount you can paythem is different, so that can
be problematic.
Speaker 1 (04:25):
And that makes me think.
A lot of people have also askedlike do you have to pay all of
them?
What's a good rule of thumb forhow much?
How old do they have to be?
We're gonna kind of hit on allof those.
But yeah, if you worked outsomething with your partner
where you're both just payingone kid, I mean that can help
reduce the tax system and youcan, you know, maybe not
(04:46):
necessarily be even as far as ifthey had three kids and you
have two or something, but youdefinitely could talk about it
and work something out.
But the very first step is tofigure out what your child can
do in your business.
And I know sometimes that canget a little tricky, like asking
us, for instance, what can kidsdo in our business?
And it's not necessarilyaccounting.
So that could be helping cleanthe office, scanning papers,
(05:08):
cleaning that type of thingaround the office, and filing or
shredding documents.
Speaker 2 (05:13):
Kids love to use the shredder.
Speaker 1 (05:15):
Yes, so little things like that.
And if you're thinking about itin 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 thatyou're paying each month if
they were to help you out a fewhours every day after school or
something like that.
So let's get into a little bitmore of the fine details of this
, and one of those is justmaking sure they're doing
(05:37):
legitimate work.
Like we said filing papers, itcould be social media, help
cleaning your office, packaging,product modeling for your brand
.
There are so many things theycould be helpful with.
You just must make sure thatit's age appropriate and
necessary for your type ofbusiness.
Speaker 2 (05:53):
And having a single picture of your family on your
Facebook page is probably notgoing to cut it.
You're going to need to get alittle bit more creative than
that.
Speaker 1 (06:00):
And that leads me to just explain that that's not
anything that you're submittingwith the IRS, like with your tax
return or anything.
That's just something that, ifthey were to audit you, you
would need to have all of thesethings we're going to talk about
in place to make sure thatyou're proving that it's
legitimate and that you'reallowed to do the things that
you're doing.
So, as far as filing your taxreturn, you need none of that,
(06:22):
but we're going to talk aboutsome of the things to just make
sure you have in place so thatif, 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 theysay is that you need a
reasonable wage.
Speaker 2 (06:34):
Now there's a lot of states where the minimum wage is
already on its way to being $15an hour.
So I mean, if you think aboutit, to hit 15,000, uh, then you,
they would need to work athousand hours for the year,
which is less than a hundredhours a month, um, which is
about, you know, 15 to 20 hoursa week.
So, depending on what they'redoing, how old they are and how
complicated the work they'redoing is, that can vary.
(06:55):
You know a great deal on howmuch you pay them.
Speaker 1 (06:58):
Right, this just means.
Speaker 2 (06:59):
Say, if you have a 16 year old that's doing all of
your social media marketing, Imean they could easily be making
$15,000 a year.
If you have a five year oldthat's sweeping your office, it
might be hard to do the full15,000 and you know, have it be
legitimate unless you're reallymaking your five year old work.
Speaker 1 (07:15):
You know 15 to 20 hours a week unless you're
really making your five-year-oldwork, 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 filepaperwork or staple.
It needs to be a reasonablewage.
But also, once again, like Isaid before, there's not really
any direct like you have to paythem this much, or this person
that is five years old can onlymake this much.
It's really up to yourdiscretion.
(07:36):
So, like with clients, I knowCarson usually just tells them
like look, you should probablynot pay your five-year-old as
much as you're paying a mucholder kid that is able to do
more work.
Speaker 2 (07:46):
But there are exceptions to that.
If you have an online clothingboutique, let's say, and you
have a five-year-old and yourtarget market is children's
clothing, Well, I mean, if youhave your five-year-old modeling
those clothes a lot, then youknow modeling is more than $15
an hour.
Child models get paid 25 to $50an hour.
That's pretty standard.
So they wouldn't have to work athousand hours a month to reach
(08:09):
that limit, you know.
I mean they could easily beworking a total of four or 500
hours for the year and withtaking pictures of all the
different clothes and everything, and you could definitely
justify $15,000, even for afive-year-old in that
circumstance.
But if you have a excavationcompany, it might be harder to
make that claim.
Speaker 1 (08:29):
Absolutely.
It just all really depends onyour situation and there's not
direct guidelines on like peoplealways want like an exact
number and we just can't givethem that because that's not how
it on.
Like people always want like anexact number and we just can't
give them that because that'snot how it's laid out by the.
Speaker 2 (08:41):
IRS Right.
Speaker 1 (08:43):
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 ourchildren $15,000, and that would
be $45,000 of expenses we getto use in our business but not
income that we have to pay taxeson.
Speaker 2 (09:00):
We don't do that.
We don't do all $15,000.
I think we will.
One day We'll have them all putto work, but you know we do
have a five-year-old.
Speaker 1 (09:08):
Yeah, she's not quite there yet.
Speaker 2 (09:10):
She's not quite worth $15,000 a year yet.
Speaker 1 (09:13):
But you can see how it would really add up.
But you can see how it wouldreally add up and it's
completely legal, so many peopleuse this.
It's definitely a great way toget your kids involved in your
business and also save sometaxes.
So the next step on this justto make it all legitimate and
what the IRS wants you to do isto create a job description for
them, just like you would anyother employee in your business.
(09:33):
It does not have to be crazyJust write something down on a
sheet of paper.
This is what their job is andthis is what they're doing, so
their tasks, how often they workand what you're paying them.
Speaker 2 (09:44):
Just like any employee.
Again, what do they get paidper hour?
How many hours did they work?
It's real simple.
You just need to keep track ofit.
Speaker 1 (09:49):
Just keep that on hand, because that's
documentation that the IRS mayask you for.
Once again, you do not have tosubmit this to anyone unless
you're ever asked for it.
Then the next step would be toactually pay them.
So if you are an S-corp, likeus and you already have payroll
going, that is super simple toadd them to payroll and you can
(10:10):
do that through QuickBooks orGusto or however you're running
payroll Super simple, you justhave to put in once again how
much you're going to be payingthem and let it start paying
them whenever you're ready.
Speaker 2 (10:19):
So whether it's an S-corp or not is important,
because if you have a soleproprietorship, for example,
which could be a Schedule Cbusiness or a Schedule F farm,
then whenever you pay your kids,you don't have to pay payroll
taxes, and neither do they aslong as you are the 100% owner
of this business, and so that'san even bigger benefit.
(10:39):
If you're paying them out of abusiness like that, you can also
get a benefit from paying themout of your S-Corp, but you do
have to pay the Social Securityand Medicare taxes, which are
also called payroll taxes, onthose kids.
And so if you are in the 10 or12% income tax bracket, it
actually doesn't make sense topay your kids because you're
paying 15.3% in payroll taxes tohave them on payroll.
(11:03):
But if you're in the 22% orhigher tax bracket, it does make
sense because you're saving,whatever your income tax rate is
22% or more, and you're onlyhaving to pay out 15.3%.
But, as you can see, that's ahuge difference compared to the
sole proprietorship or the farm,which is able to deduct that
payroll expense and not pay anypayroll taxes.
So, no matter what your incometax bracket is, that's
(11:25):
beneficial for you.
Speaker 1 (11:26):
Yeah.
So if you're a sole proprietoror you file your business on
Schedule C of your 1040, this isa really great tax strategy for
you to use, because you do nothave to pay payroll taxes.
Now, the biggest part of thisis actually paying them, and
this is where we get the mostquestions and I think, maybe
because it sounds too good to betrue, that's why we get
(11:46):
questions about it.
But so you're paying them fromyour business and you set it up.
Let's say, you set up a directdeposit.
Does it have to go?
Speaker 2 (11:58):
into their account, like what are the rules around
that money actually going tothem?
They are minors, so you'recompletely in control of this
money.
It can go into a checkingaccount that you use to pay for
all of their many, many sportsrelated expenses.
The food that they eat, evencontributing to household bills.
They live in the house, theyeat the food, they use the
electricity.
Those are all fine options ifyou need that money to live off
of.
Speaker 1 (12:17):
And a lot of people do.
They're saying well, I can'tafford to pay my child and
that's whenever we address thisissue is that you can put it
into your personal account.
So when that paycheck goesthrough, it would just be
transferred to your account andjust use it as you would any
other funds that you receivefrom the business, so you do not
have to put in an account intheir name, you do not have to
let them spend it.
It is still your money.
(12:38):
Now, if you are in the positionwhere you're trying to lower
your taxes and you have a lot ofextra income you're trying to
get rid of, but you don'tnecessarily need that money, we
do have some things that werecommend that you could do with
the money, but just make surethat you know that you do not
have to put this money in achild's account or give them
this money.
So what are some other thingsthat people could do with the
(13:00):
money that you recommend ifthey're not looking to keep it
themselves?
Speaker 2 (13:04):
Well, you can put up to $7,000 a year into a Roth IRA
for them.
So they have to be earning atleast $7,000 or more for you to
do that.
But if you're paying them up tothe $15,000 maximum we
recommend, then, yeah, put 7,000of it into a Roth IRA, starting
it when they're teenagers.
You would not believe theamount of compound interest
they'll have and that money that$7,000 will be.
(13:27):
I mean, it will be worth 12 to15 times that amount of money by
the time they're at retirementage.
So that's one option.
Now another option would beputting it into a college
savings account, whether it's anESA or a 529 plan.
That's another great place toput that money and you're in
complete control of it again.
So you can put it there to makesure that they have money for
(13:47):
college and they're kind ofearning it themselves.
Speaker 1 (13:49):
Yeah, so it's a win-win Either way, whatever you
choose to do with it, you canuse it for school or summer
camps or groceries, or you couldset them up for retirement or
some sort of school plan usingthat money.
There's really no rules on whatyou use it once you pay them.
Speaker 2 (14:04):
Or force them to put in a savings account that they
use to buy their car with andpay for their insurance and gas
on that car out of that, I mean,it's really up to you.
Speaker 1 (14:12):
Yeah, you absolutely can set them up accounts and
then have the money go into thataccount, so it's really all up
to you on that part.
Now the final step in all ofthis is just to track it like a
real expense, just like anythingelse in your business.
So whenever that transactioncomes up in your bookkeeping,
make sure that you'recategorizing that as payroll and
just treating it like an actual, real expense.
Speaker 2 (14:35):
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 Cbusiness or a Schedule F
business, then there's a way toset up an employee to mark a box
in QuickBooks to indicate thatthey're exempt from Social
Security and Medicare taxes.
You do that to make sure thatthey don't withhold that money,
(14:57):
because then you don't get itback.
If the payroll system takesthat 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 soleproprietorship, that you set
that up properly and reach outto your tax professional if you
need help with that.
Speaker 1 (15:11):
So to summarize this episode, the IRS says, yes, you
can pay your kids as long asit's real work, it's a
reasonable amount of pay and youdocument it properly.
So many people use this.
We recommend it to everyone.
It's not.
I guess some people like thinkthat it's like too gray of an
area.
It's not.
People use this all the time.
Speaker 2 (15:30):
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 forMcDonald's, they're not in
complete control of that money.
You are still in control ofthat money as long as they're a
minor, so it's the same thing ifthey work for you.
Speaker 1 (15:44):
And this also is not a tax strategy that you have to
be super wealthy millionaire touse.
Actually, it benefits you waymore if you're a sole proprietor
.
So so many people listening tothis podcast can definitely take
advantage of this, starting in2025.
So I know it sounds like a lotof steps to do, but if you have
a payroll program, you can getthat set up through them or add
(16:07):
it to your QuickBooks.
Just make sure you're checkingthe correct options, like Carson
said, so that you're not payingthose taxes if you don't have
to.
Speaker 2 (16:13):
And if I mean just think, if you're in the 22% tax
bracket, which is a prettymedium level tax bracket, you
could be saving up to $3,000 perkid or more just by doing this.
Speaker 1 (16:24):
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 afellow business owner, because
that's how this podcast grows.
And until next time, thank youso much for listening to.
Speaker 2 (16:40):
What your CPA Wants you To Know.
Speaker 1 (16:42):
Podcast.
Speaker 2 (16:49):
This podcast is intended to provide accounting
and tax information foreducational purposes only.
All tax situations are uniqueand should be handled with the
assistance of a tax professional.
Yeah.
So if you're a sole proprietoror you file your business on
Schedule C of your 1040, this isa really great tax strategy for
you to use, because you do nothave to pay payroll taxes.
Speaker 2 (00:17):
Welcome to what your CPA Wants you To Know.
Speaker 1 (00:20):
Tax and accounting help can be expensive, so we've
created this podcast to helpguide you through it all and
make you feel like you have aCPA in your back pocket.
Speaker 2 (00:31):
I'm Carson Sands.
Speaker 1 (00:32):
And I'm Taryn Sands.
Speaker 2 (00:34):
I'm a CPA with over 10 years of experience helping
people start and grow theirbusinesses.
Speaker 1 (00:39):
And I'm an MBA with a specialization in marketing and
entrepreneurship.
Taxes suck and we want to makesure you don't pay more than
your fair share.
Speaker 2 (00:49):
We're here to share everything your CPA wants you to
know.
Speaker 1 (00:53):
In a fun and easy to understand way.
Speaker 2 (00:56):
Let's get started.
Speaker 1 (00:58):
Let's do it.
Welcome back to the podcasttoday, Carson.
It's our first episode sincetax season ended.
Speaker 2 (01:08):
What is a podcast?
Speaker 1 (01:12):
Yeah, that's about how we're both feeling right now
.
It's all so nice for it to beover, but it's also not really
over, because we have a lot moretax returns to do.
Speaker 2 (01:22):
Three or four at least.
Speaker 1 (01:23):
We do have quite a long list, but I guess what it
really means is that we're notgoing to work weekends anymore
and we're going to just end at anormal time.
And then you know, we haveuntil October to get all of that
filed.
So it does give a little bit ofa break, because Carson's been
working seven days a week for abunch of weeks now, which is why
he also can't form very manywords at once.
Speaker 2 (01:44):
Three or four.
Speaker 1 (01:45):
You're really going to have to talk more on this
podcast.
Okay, I'll try.
He also doesn't know what we'retalking about today, so let me
enlighten you and all thelisteners.
We are going to talk aboutsomething that we talked a lot
about with clients this taxseason, and the question was can
I really pay my kids through mybusiness?
And if you didn't know, theanswer is yes, absolutely you
(02:06):
can and you should.
So this episode is going to beall about why that is a good tax
strategy and how you can do itin your business.
So, carson, why don't you startus off by first telling us why
should you pay your kids throughyour business?
How does that help you reducethe amount of taxes that you
will pay?
Speaker 2 (02:25):
Well, it can help a lot because your kid's income
tax rate is probably zero.
If they make less than $15,000for 2025, their income tax rate
is definitely 0% and, dependingon what kind of business you
have, you may not even have topay payroll taxes on the money
that you pay them.
So this is a way of almost justmaking income disappear, but
legally.
Speaker 1 (02:45):
So, to make it a little simpler, you will pay
them from your business, whichmeans that is an expense for
your business.
So that is going to reduce whatyou're paying taxes on.
But the best part is you're notgoing to pay taxes on what you
actually paid, because theperson receiving it your child
does not have to file a taxreturn if they make less than
(03:07):
standard deduction, which, likeCarson said, is $15,000 for 2025
.
So if you pay them out of yourbusiness, 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'thave to file a tax return.
So it's kind of like a win-win.
Speaker 2 (03:22):
It's great actually, and now one of the things you
have to remember is that they doactually need to be working for
you, so find something that isage appropriate for them to do.
Speaker 1 (03:31):
Okay, you're getting a little ahead of me, but now
that we know why we should dothis to help lower taxes then
we'll get into a little bit moreof the nitty gritty and the IRS
rules with that.
But pretty much every businessowner should be doing this If
you are trying to really get ridof some of that income and
decrease your taxes.
It's definitely easier ifyou're a business like ours or
(03:52):
it's just us two and we're like,yeah, let's pay all three of
the kids and you know, help withtaxes.
So it can get a little trickier, I know, with businesses that
have multiple owners, like howyou're going to work this out,
but for the most part it's veryeasy if you're doing it with a
sole proprietor or if you are inbusiness with your husband or
something, or you could probablywork it out with your partner
if you both wanted to pay achild from the business.
Speaker 2 (04:14):
That can get tricky if you have a different number
of children or different ages ofchildren making it to where you
know the amount you can paythem is different, so that can
be problematic.
Speaker 1 (04:25):
And that makes me think.
A lot of people have also askedlike do you have to pay all of
them?
What's a good rule of thumb forhow much?
How old do they have to be?
We're gonna kind of hit on allof those.
But yeah, if you worked outsomething with your partner
where you're both just payingone kid, I mean that can help
reduce the tax system and youcan, you know, maybe not
(04:46):
necessarily be even as far as ifthey had three kids and you
have two or something, but youdefinitely could talk about it
and work something out.
But the very first step is tofigure out what your child can
do in your business.
And I know sometimes that canget a little tricky, like asking
us, for instance, what can kidsdo in our business?
And it's not necessarilyaccounting.
So that could be helping cleanthe office, scanning papers,
(05:08):
cleaning that type of thingaround the office, and filing or
shredding documents.
Speaker 2 (05:13):
Kids love to use the shredder.
Speaker 1 (05:15):
Yes, so little things like that.
And if you're thinking about itin 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 thatyou're paying each month if
they were to help you out a fewhours every day after school or
something like that.
So let's get into a little bitmore of the fine details of this
, and one of those is justmaking sure they're doing
(05:37):
legitimate work.
Like we said filing papers, itcould be social media, help
cleaning your office, packaging,product modeling for your brand
.
There are so many things theycould be helpful with.
You just must make sure thatit's age appropriate and
necessary for your type ofbusiness.
Speaker 2 (05:53):
And having a single picture of your family on your
Facebook page is probably notgoing to cut it.
You're going to need to get alittle bit more creative than
that.
Speaker 1 (06:00):
And that leads me to just explain that that's not
anything that you're submittingwith the IRS, like with your tax
return or anything.
That's just something that, ifthey were to audit you, you
would need to have all of thesethings we're going to talk about
in place to make sure thatyou're proving that it's
legitimate and that you'reallowed to do the things that
you're doing.
So, as far as filing your taxreturn, you need none of that,
(06:22):
but we're going to talk aboutsome of the things to just make
sure you have in place so thatif, 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 theysay is that you need a
reasonable wage.
Speaker 2 (06:34):
Now there's a lot of states where the minimum wage is
already on its way to being $15an hour.
So I mean, if you think aboutit, to hit 15,000, uh, then you,
they would need to work athousand hours for the year,
which is less than a hundredhours a month, um, which is
about, you know, 15 to 20 hoursa week.
So, depending on what they'redoing, how old they are and how
complicated the work they'redoing is, that can vary.
(06:55):
You know a great deal on howmuch you pay them.
Speaker 1 (06:58):
Right, this just means.
Speaker 2 (06:59):
Say, if you have a 16 year old that's doing all of
your social media marketing, Imean they could easily be making
$15,000 a year.
If you have a five year oldthat's sweeping your office, it
might be hard to do the full15,000 and you know, have it be
legitimate unless you're reallymaking your five year old work.
Speaker 1 (07:15):
You know 15 to 20 hours a week unless you're
really making your five-year-oldwork, 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 filepaperwork or staple.
It needs to be a reasonablewage.
But also, once again, like Isaid before, there's not really
any direct like you have to paythem this much, or this person
that is five years old can onlymake this much.
It's really up to yourdiscretion.
(07:36):
So, like with clients, I knowCarson usually just tells them
like look, you should probablynot pay your five-year-old as
much as you're paying a mucholder kid that is able to do
more work.
Speaker 2 (07:46):
But there are exceptions to that.
If you have an online clothingboutique, let's say, and you
have a five-year-old and yourtarget market is children's
clothing, Well, I mean, if youhave your five-year-old modeling
those clothes a lot, then youknow modeling is more than $15
an hour.
Child models get paid 25 to $50an hour.
That's pretty standard.
So they wouldn't have to work athousand hours a month to reach
(08:09):
that limit, you know.
I mean they could easily beworking a total of four or 500
hours for the year and withtaking pictures of all the
different clothes and everything, and you could definitely
justify $15,000, even for afive-year-old in that
circumstance.
But if you have a excavationcompany, it might be harder to
make that claim.
Speaker 1 (08:29):
Absolutely.
It just all really depends onyour situation and there's not
direct guidelines on like peoplealways want like an exact
number and we just can't givethem that because that's not how
it on.
Like people always want like anexact number and we just can't
give them that because that'snot how it's laid out by the.
Speaker 2 (08:41):
IRS Right.
Speaker 1 (08:43):
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 ourchildren $15,000, and that would
be $45,000 of expenses we getto use in our business but not
income that we have to pay taxeson.
Speaker 2 (09:00):
We don't do that.
We don't do all $15,000.
I think we will.
One day We'll have them all putto work, but you know we do
have a five-year-old.
Speaker 1 (09:08):
Yeah, she's not quite there yet.
Speaker 2 (09:10):
She's not quite worth $15,000 a year yet.
Speaker 1 (09:13):
But you can see how it would really add up.
But you can see how it wouldreally add up and it's
completely legal, so many peopleuse this.
It's definitely a great way toget your kids involved in your
business and also save sometaxes.
So the next step on this justto make it all legitimate and
what the IRS wants you to do isto create a job description for
them, just like you would anyother employee in your business.
(09:33):
It does not have to be crazyJust write something down on a
sheet of paper.
This is what their job is andthis is what they're doing, so
their tasks, how often they workand what you're paying them.
Speaker 2 (09:44):
Just like any employee.
Again, what do they get paidper hour?
How many hours did they work?
It's real simple.
You just need to keep track ofit.
Speaker 1 (09:49):
Just keep that on hand, because that's
documentation that the IRS mayask you for.
Once again, you do not have tosubmit this to anyone unless
you're ever asked for it.
Then the next step would be toactually pay them.
So if you are an S-corp, likeus and you already have payroll
going, that is super simple toadd them to payroll and you can
(10:10):
do that through QuickBooks orGusto or however you're running
payroll Super simple, you justhave to put in once again how
much you're going to be payingthem and let it start paying
them whenever you're ready.
Speaker 2 (10:19):
So whether it's an S-corp or not is important,
because if you have a soleproprietorship, for example,
which could be a Schedule Cbusiness or a Schedule F farm,
then whenever you pay your kids,you don't have to pay payroll
taxes, and neither do they aslong as you are the 100% owner
of this business, and so that'san even bigger benefit.
(10:39):
If you're paying them out of abusiness like that, you can also
get a benefit from paying themout of your S-Corp, but you do
have to pay the Social Securityand Medicare taxes, which are
also called payroll taxes, onthose kids.
And so if you are in the 10 or12% income tax bracket, it
actually doesn't make sense topay your kids because you're
paying 15.3% in payroll taxes tohave them on payroll.
(11:03):
But if you're in the 22% orhigher tax bracket, it does make
sense because you're saving,whatever your income tax rate is
22% or more, and you're onlyhaving to pay out 15.3%.
But, as you can see, that's ahuge difference compared to the
sole proprietorship or the farm,which is able to deduct that
payroll expense and not pay anypayroll taxes.
So, no matter what your incometax bracket is, that's
(11:25):
beneficial for you.
Speaker 1 (11:26):
Yeah.
So if you're a sole proprietoror you file your business on
Schedule C of your 1040, this isa really great tax strategy for
you to use, because you do nothave to pay payroll taxes.
Now, the biggest part of thisis actually paying them, and
this is where we get the mostquestions and I think, maybe
because it sounds too good to betrue, that's why we get
(11:46):
questions about it.
But so you're paying them fromyour business and you set it up.
Let's say, you set up a directdeposit.
Does it have to go?
Speaker 2 (11:58):
into their account, like what are the rules around
that money actually going tothem?
They are minors, so you'recompletely in control of this
money.
It can go into a checkingaccount that you use to pay for
all of their many, many sportsrelated expenses.
The food that they eat, evencontributing to household bills.
They live in the house, theyeat the food, they use the
electricity.
Those are all fine options ifyou need that money to live off
of.
Speaker 1 (12:17):
And a lot of people do.
They're saying well, I can'tafford to pay my child and
that's whenever we address thisissue is that you can put it
into your personal account.
So when that paycheck goesthrough, it would just be
transferred to your account andjust use it as you would any
other funds that you receivefrom the business, so you do not
have to put in an account intheir name, you do not have to
let them spend it.
It is still your money.
(12:38):
Now, if you are in the positionwhere you're trying to lower
your taxes and you have a lot ofextra income you're trying to
get rid of, but you don'tnecessarily need that money, we
do have some things that werecommend that you could do with
the money, but just make surethat you know that you do not
have to put this money in achild's account or give them
this money.
So what are some other thingsthat people could do with the
(13:00):
money that you recommend ifthey're not looking to keep it
themselves?
Speaker 2 (13:04):
Well, you can put up to $7,000 a year into a Roth IRA
for them.
So they have to be earning atleast $7,000 or more for you to
do that.
But if you're paying them up tothe $15,000 maximum we
recommend, then, yeah, put 7,000of it into a Roth IRA, starting
it when they're teenagers.
You would not believe theamount of compound interest
they'll have and that money that$7,000 will be.
(13:27):
I mean, it will be worth 12 to15 times that amount of money by
the time they're at retirementage.
So that's one option.
Now another option would beputting it into a college
savings account, whether it's anESA or a 529 plan.
That's another great place toput that money and you're in
complete control of it again.
So you can put it there to makesure that they have money for
(13:47):
college and they're kind ofearning it themselves.
Speaker 1 (13:49):
Yeah, so it's a win-win Either way, whatever you
choose to do with it, you canuse it for school or summer
camps or groceries, or you couldset them up for retirement or
some sort of school plan usingthat money.
There's really no rules on whatyou use it once you pay them.
Speaker 2 (14:04):
Or force them to put in a savings account that they
use to buy their car with andpay for their insurance and gas
on that car out of that, I mean,it's really up to you.
Speaker 1 (14:12):
Yeah, you absolutely can set them up accounts and
then have the money go into thataccount, so it's really all up
to you on that part.
Now the final step in all ofthis is just to track it like a
real expense, just like anythingelse in your business.
So whenever that transactioncomes up in your bookkeeping,
make sure that you'recategorizing that as payroll and
just treating it like an actual, real expense.
Speaker 2 (14:35):
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 Cbusiness or a Schedule F
business, then there's a way toset up an employee to mark a box
in QuickBooks to indicate thatthey're exempt from Social
Security and Medicare taxes.
You do that to make sure thatthey don't withhold that money,
(14:57):
because then you don't get itback.
If the payroll system takesthat 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 soleproprietorship, that you set
that up properly and reach outto your tax professional if you
need help with that.
Speaker 1 (15:11):
So to summarize this episode, the IRS says, yes, you
can pay your kids as long asit's real work, it's a
reasonable amount of pay and youdocument it properly.
So many people use this.
We recommend it to everyone.
It's not.
I guess some people like thinkthat it's like too gray of an
area.
It's not.
People use this all the time.
Speaker 2 (15:30):
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 forMcDonald's, they're not in
complete control of that money.
You are still in control ofthat money as long as they're a
minor, so it's the same thing ifthey work for you.
Speaker 1 (15:44):
And this also is not a tax strategy that you have to
be super wealthy millionaire touse.
Actually, it benefits you waymore if you're a sole proprietor
.
So so many people listening tothis podcast can definitely take
advantage of this, starting in2025.
So I know it sounds like a lotof steps to do, but if you have
a payroll program, you can getthat set up through them or add
(16:07):
it to your QuickBooks.
Just make sure you're checkingthe correct options, like Carson
said, so that you're not payingthose taxes if you don't have
to.
Speaker 2 (16:13):
And if I mean just think, if you're in the 22% tax
bracket, which is a prettymedium level tax bracket, you
could be saving up to $3,000 perkid or more just by doing this.
Speaker 1 (16:24):
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 afellow business owner, because
that's how this podcast grows.
And until next time, thank youso much for listening to.
Speaker 2 (16:40):
What your CPA Wants you To Know.
Speaker 1 (16:42):
Podcast.
Speaker 2 (16:49):
This podcast is intended to provide accounting
and tax information foreducational purposes only.
All tax situations are uniqueand should be handled with the
assistance of a tax professional.
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