Filing, stuffing envelopes, picking up the mail, answering the phone, cleaning the office, are all daily tasks that are essential to your business. These tasks, and many others, are necessary for the operation of your business and in many cases are the things that you just don’t seem to have time for. How about hiring your children to do the work for you? The work is necessary and is commensurate with the experience level of your children. They can be a valuable resource since they can be available, responsive, efficient and relatively inexpensive. Who knows, they may even learn something about your business and about themselves. While all of those benefits are important, the financial reward of hiring your children is the tax benefit.

The wages paid to your dependent child under 18 years of age are not subject to any federal payroll withholding requirements when your child earns less than $4,800 during 2003. If indeed they earn less than $4,800, they would not be required to file a federal income tax return and they would pay no tax. The best news is that the wages ARE tax deductible for your business just as are any other wages paid. Further, the wages are not subject to Social Security, Medicare or Federal Unemployment Tax.

So let’s summarize. You hire your child to provide services to your business. The wages are effectively tax free, provided your child earns less than $4,800. The wages are fully deductible for your business. As a sole proprietorship, the wages reduce federal taxable income on your Schedule C and earnings subject to self-employment taxes on Schedule SE. The tax savings could be as high as 43% of the wages paid. Therefore, wages of $4,800 would generate a tax savings of about $2,000. In effect, the IRS is paying almost half of the wages to your children, and this is for money that you are probably giving to them anyway. So put your kids to work, put them on the payroll, and pay less tax to the IRS.