Using your personal kids can imply tax aid for entrepreneurs

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If you're self-employed, hiring your children can provide tax benefits – provided you follow labor laws and IRS regulations, experts say.

Small businesses hiring their own children is a popular topic among social media influencers on platforms like TikTok, Instagram and YouTube, but tax experts say they often struggle with misinformation in such posts.

“Most videos on TikTok have some truth in them, but they are embellished or only make sense in very specific situations,” Matt Metras, a Rochester, New York-based tax consultant and owner of MDM Financial Services, previously told CNBC.

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“But if you have a 60-second video, don’t try to convey that nuance,” Metras said.

If you're planning to hire your kids this summer, there are a few important things you should know, according to financial experts.

Employing your children can be “tax-efficient”

“Hiring your child can be a tax-wise decision,” said certified financial planner Sean Lovison, founder of Purpose Built Financial Services in the Philadelphia area. “Their wages can be deducted as a business expense, which can result in significant savings for your small business.”

For 2024, the federal standard deduction for individuals is $14,600.

“If your child's income is within the limits, he or she may not have to pay income tax, which can be beneficial for both parties,” said Lovison, who is also a certified public accountant.

Additionally, according to the IRS, payments to children may avoid Medicare and Social Security taxes, depending on the child's age and the legal structure of your business.

If your child's income is within the limits, he or she may not have to pay income tax, which can be beneficial for both parties.

Sean Lovison

Founder of Purpose Built Financial Services

Once your child has earned income, or wages from employment, he or she can contribute to an individual Roth retirement account, which experts say can be worthwhile for younger savers.

For kids, there's a triple tax benefit: They typically pay little to no taxes on their contributions, plus growth is tax-free and withdrawals are typically tax-free in retirement, says CFP Carol Fabbri, managing partner of Fair Advisors in Conifer, Colorado.

“It’s never too early to start saving,” she added.

However, you must meet the 2024 contribution limit, which is equal to your child's total income or $7,000, whichever is less.

What you should know before hiring your children

Experts advise familiarizing yourself with state and federal labor laws and tax regulations before hiring your children.

“Some states prohibit the hiring of children under 14 under virtually all circumstances,” Lovison said.

If your children are hired, they will have to do real work for the company and their compensation should be appropriate for their duties.

“Recordkeeping is non-negotiable,” Lovison said. “Not only will it help you navigate the tax landscape, but it will also serve as a valuable resource if questions arise about your child's employment.”

Payments to children are subject to withholding, regardless of the child's age, according to the IRS. If you hire children as W-2 employees and withhold taxes, “you're safe,” but they'll get a full refund of the taxes paid if they fall under the standard deduction, Lovison said.