Hiring your children is a great way to shift income and reduce your overall tax burden. Your children must do real work for the pay they get. Your children are paid at their tax rate which is most likely lower than your tax rate. Children who earn wages are not subject to the kiddie tax rule.

Another upside of hiring your children is you do not have to pay social security and medicare wages on their income. This applies as long as you and/or your spouse own 100% of the business. This is a savings of 15.4% in taxes. Moreover, wages to your children are not subject to federal unemployment taxes (FUTA). This is valid as long as your child is under the age of 21.

If your child’s income is less than the standard deduction for the year and he or she has less than $250 in unearned income, you will not need to withhold any federal taxes.

Furthermore, to maximize tax savings when you hire your child, open an IRA for him/her and deduct the contributions.

Hiring your child caveat

The amount you pay your child must be reasonable for the type of work they do. You cannot pay your child $100 an hour for wiping down tables. The amount that is considered reasonable will be similar to what you pay a stranger to do the same type of work. Also, pay your child with the same frequency used to pay a stranger. Make sure your child has a bank account in his or her name. You can also use a trust to deposit your child’s pay.

Finally be sure you still follow the rules of hiring a stranger such as:

• Issuing a W-2 at the end of the year
• Filing quarterly tax returns (form 941)
• Filing annual tax return (form 940)

Owning your business is a great way to save on taxes and hiring your child is just another way you can save taxes in your business.