Becoming a successful small business owner is one of the hardest things that a person can do. For decades, the chances of a small business with employees making it past the five-year mark has been remarkably consistent, at roughly a 50/50 proposition. And at 10 years, the numbers are even worse, with only around a third of the original businesses still hanging on.
With the chances of success being so statistically low, one has to ask themselves, “Why are there still so many people willing to take on the long odds?” And why the answers are surely varied, one of the most common reasons individuals seek to become business owners is that they are able to have more control over decisions. Those decisions include, among others, what types of solutions the business will offer, how it will service its clients/customers, who the business will use for vendors, and who the business will hire (and fire).
And as the IRS’s own website itself says: “One of the advantages of operating your own business is hiring family members”. That family member can be a spouse, sibling, parent, or even a child. In fact, while hiring a child may not seem like a top-of-mind move for many businesses owners, if you play by the rules, there can be a surprisingly broad array of tax (and other) benefits to doing so!
In fact, with the Tax Cuts and Jobs Act increasing the Standard Deduction up to $12,200 (in 2019), children employed in a family business can earn that much in income and enjoy a 0%(!) tax rate on their income (at least for Federal tax purposes), all without facing the Kiddie Tax (which only applies to unearned income). In addition, many states will also permit children employed in the business to avoid unemployment (FUTA) taxes, and children working for their parents’ sole proprietorship, partnership, or LLC may also avoid self-employment (FICA) taxes as well. Which can be a material tax savings for many families, and especially those with high-income parental business owners. Furthermore, employing a children in the business also creates earned income that can qualify the child to make a Roth IRA contribution, and/or qualify the child for other employee benefits.
The caveat, though, is that employing a child in the business still requires that he/she do bona fide (age-appropriate) work in the business (i.e., a “real” job), for a “reasonable” (and not excessive for tax purposes) wage, and the work must comply with both Federal Fair Labor Standards Act (FLSA) rules (which fortunately are fairly flexible for parents employing their children in their own wholly-parental-owned business), and state child labor laws as well.
source https://www.kitces.com/blog/tax-rules-hiring-children-family-business-flsa-tax-savings-standard-deduction-roth-contribution/
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