Tik Tok Advice: Hire Your Child for Tax Savings?

Can you hire your child so they earn tax-free income and reduce your business’ taxable income?

You’ll find all sorts of tax “advice” on Tik Tok nowadays. I put quotations around the word “advice” because it may not actually be advisable “advice” as in, it may be bad advice or not well thought out or lacking in many important nuances and details. One of the big topics is, ‘hire your kids and pay less in taxes’. Is this click-bait or is there something behind it?

Can you pay your kids non-taxable income to reduce your business’ taxable income?

The short answer, or rather, answers are yes and no.

Child Labor Laws:

Employing a child requires bona-fide and age appropriate work tasks in the business amongst other restrictions. In 1938 the Fair Labor Standard Act (FLSA) was signed into law establishing minimum wage, overtime pay guidelines and restrictions on child labor to ensure that when young people work, the work is safe and does not jeopardize their health, well-being or educational opportunities.

The child labor laws restrictions and differences are broken down by age groups: under 14, 14 and 15, 16 and 17 and 18 and older.

Tier 1: Children under 14 (13 years old and younger) are not allowed to be employed outside of farm work. This includes restaurants. There are a couple exemptions under FLSA which does allow a child who is under 14 to work. These tasks include delivering newspapers, casual baby-sitting, light chores in private homes, modeling or acting and an interesting remnant from history; making evergreen wreaths.

Tier 2: Children 14 and 15 are allowed to be employed and work in a much larger occupational spectrum, with continued restriction in mining and manufacturing, as long as working hours and times of year are not in conflict with the regulations defining school hours and educational opportunities. This tier of age groups still has many restrictions including limited hours worked which would need to be carefully reviewed prior to hiring a young person into a particular job.

Tier 3: Young people of the ages 16 and 17 may work an unlimited amount of hours in any occupation except in those deemed hazardous. They also have a limit on jobs requiring driving.

However, with these age groups delineated and restrictions outlined, there is an exemption to this law in § 570.122 (a) (4) which bypasses all the occupational restrictions except manufacturing and mining as well as anything the Secretary of Labor may deem as hazardous or detrimental to their health or well-being. This is the Parental exemption § 570.126.

It basically says that the occupational restrictions in tiers one and two are exempt for those who are employed by their parents. The limited hours restrictions are still in place as are the restrictions to manufacturing, mining and occupations that the Secretary of State would deem as hazardous. The exemption continues to 16 and 17 years old only being restricted in occupations that may be deemed detrimental to their health or well-being.

Tik Tok Omission of Truth #1: Your kid can earn up to the standard deduction and still may pay state taxes.

Thanks to the Tax Cuts and Jobs Act of 2017, the standard deduction was increased almost two-fold and is increased annually for inflation. The standard deduction in a nut shell basically means, anyone can earn wages up to a certain dollar amount without having to pay income taxes on it. As of 2023, the standard deduction for single filers begins at $13,850. That means the first $13,850 that a taxpayer earns is not taxed. So if you make less than or equal to this amount, you will not owe federal income taxes for the year.

The first commonly glossed over nuance that these popular Tik Tok videos miss is that state income tax standard deductions are often less than the federal standard deduction. So if your child (or anyone) earned up to the amount of the federal standard deduction, they would still likely be paying income taxes at the state level if your state of residency and/or employment has state level income taxes.

Tik Tok Omission of Truth #2: Not all legal structures are exempt from payroll taxes for wages paid to your child.

If you operate a sole proprietorship or are in partnership with your spouse that actively participates in the business and no other partners own a share of your business, then wages paid to your child 17 years old and under for services rendered are not subject to Social Security and Medicare. Payments made to your child under 21 years old aren’t subject to federal unemployment taxes. Depending on your state, you may still be subject to all or some of the standard state payroll taxes.

If your business’ entity is a corporation or taxed as a corporation or a is a partnership with a partner who is not your spouse, then those payments are subject to all standard payroll taxes including Social Security, Medicare, federal unemployment taxes and potentially state payroll taxes.

There’s another social media myth to try to get around the corporate entity tax requirements and that is to create another entity to hire your kids and the corporation would contract with that second entity for the services of the child employed by the second company. This approach is ill-advised and in the event of an audit would likely lead to IRS scrutiny on the legitimacy of the business.

If however, the family did in fact run a legitimate employment contracting service, which do exist, it would likely hold up under audit. It would be a rare occurrence for this arrangement though.

Tik Tok Omission of Truth #3: Regardless of how much or little you intend to pay your child, you will still be required to withhold for federal taxes.

All payments for services of your child that your business employs are subject to federal withholding regardless of entity type, hours worked, your child’s age, wage amount. This means that even if you plan to never pay them more than the standard deduction and you know they will not owe, you as a business are still required to withhold taxes and send those amounts to the IRS each pay period. That brings us to our next Tik Tok Omission of Truth.

Tik Tok Omission of Truth #4: Your child will still need to file an annual income tax return to get their withholding back.

Your child will need to file a tax return to get all their federal withholding back as long as they don’t owe. It’s likely your child has not had to file tax returns up to this point so this is another step to take come tax season as well as a potential new cost for you as a parent. This brings us to our next Tik Tok Omission of Truth.

Tik Tok Omission of Truth #5: Hiring your child may increase your work load and costs as a parent and as a business owner.

Filing your child’s tax return whether you pay someone else to do it or whether you do it yourself will either increase your to-do list and/or increase your costs involved.

There are more costs involved to employing your child. If you don’t have any other employees, you will see a large increase in costs including contracting or hiring a payroll service as well as remitting and filing payroll taxes. For your child’s employment to be actual employment and not just a contractor check, you will need to run a veritable payroll.

If you already have employees in your business, you are already familiar with these tasks. Your fees will likely increase by adding another employee.

Hiring a child may also have specific requirements in your state that other employees do not have such as recording and filing certificates and maintaining their fees, requirements and renewals. Maintaining compliance with these requirements will increase your action items as well as costs.

Tik Tok Omission of Truth #6: State laws may say you can’t hire your child.

Depending on your state laws and specific business situation, your state may not allow you to hire your child even if federal laws would allow it. Seek legal guidance on this to be sure you’re not breaking any child labor laws.

Tik Tok Omission of Truth #7: Hiring a baby or child that does not perform work may be considered social security fraud.

You likely cannot hire your baby. If you wouldn’t hire a stranger’s baby than you probably can’t hire your own baby. Hiring a child to do nothing could be argued as social security fraud, and would most likely be removed as a deduction or qualifying expense for credits. This would result in penalties, underpaid taxes, interest and maybe even another visit from the IRS the next year. They’d probably also want to look into the rest of your business and any other business associates or partners you have.

Furthermore, if you have one employee who does nothing for the company, other employees could legally argue that they also do not have to work.

There is one situation that a baby would be hired to do and that is modelling and acting, bringing us to the next Tik Tok omission of truth.

Tik Tok Omission of Truth #8: Hiring your child to model is not likely an employment situation.

The child must be hired for a legitimate job and the wages paid must be reasonable. Young children are allowed to model and act and this work assignment is often used for marketing purposes though unless the job is ongoing and related to the business activities it would likely result in contract-type of work versus actual employment. Contract work is taxable income for your child.

The other factor to consider when hiring your child to model or act is the reasonable salary or wage applicable to the task. Paying your child a large amount to do something you wouldn’t pay another child to do would likely result in IRS scrutiny and disallowance of the deduction.

Resulting Truth: Depending on the arrangement and specific business situation and needs, you may benefit from hiring your child.

If you have a legitimate job or position requiring an employee, particularly if you are a sole proprietor or have a partnership with your spouse, then hiring your own child is a great option for many reasons.

Employing your child can create income deductions for your business and provide the child with lowered or non-taxable income.
Services of your own child under the age of 18 are not subject to social security and Medicare.
Children under 21 are not subject to federal unemployment tax. They may however, be subject to state unemployment tax.
Children’s salaries create earned income that can be used to fund Roth IRAs.
Your child employee is generally entitled to the same benefits as other employees including HSAs, FSAs and/or retirement plan contributions.
Your child is learning valuable life and work skills and experience.
This arrangement may contribute to family bonds and greater trust between employer and employee.

Further considerations and cautions of hiring your child:

Since they are exempt from your business paying in social security and Medicare, they also won’t be contributing into their own social security either.
If you own a corporation, partnership with someone other than your spouse or if an estate is employing the child then you as the business owner will not receive those tax breaks from social security, Medicare and federal unemployment. However, the child will be contributing to their social security fund.
Creating a job because you think you’ll save on taxes likely will not save you in costs, taxes, time and management of all these admin requirements.
Consider the impact of financial aid eligibility as the child’s income may effect the Expected Family Contribution calculation on the FAFSA form.
Be mindful of their employment and income on dependency status and whether their income renders changes to various tax benefits such as the Child Tax Credit.
Keep records of their time worked and tasks performed and include them in legitimate payroll.
Their paychecks need to be deposited into a bank account with their name on it.
All forms and returns must be filed just like any other employee.
Make sure you follow state laws and file all required certificates and paperwork to employ a child.

Given the careful considerations to legal and financial aspects depending on the specific situation, hiring your child into you family business may be a great opportunity for those involved. Tax savings, family time and life lessons are excellent benefits. If your primary focus is to help your child and you also would have to hire someone else, then this is a great set up to look into.

Following tax and legal advice from Tik Tok or any social media outlet is generally a bad practice however there may be some truths hidden deep underneath omitted truths. Can you hire your child to earn tax-free income and reduce your business income at the same time? You might be able to, but there is so much more to consider and there are likely caveats and nuances involved that negate aspects of the idea. It is possible though and it is not uncommon. Be sure to seek legal advice and do your research in reference to your very specific situation though first.

If you have done your due diligence and are ready to set up payroll to add your child to our business, Accounting Freedom can help you with your endeavors as well as the business bookkeeping to keep your business audit-ready.

Referrals and references:

Youth Labor age restrictions:

https://www.dol.gov/gener al/topic/youthlabor/agerequirements

State labor laws:

https://www.dol.gov/agencies/whd/st ate

Actual laws and regulations written out:

https://www.ecfr.gov/current/title-29/subtitle-B/chapter-V/subchapter-A/part-57 0

§570.126 Parental exemption.

By the parenthetical phrase included in section 3(l)(1) of the Act, a parent or a person standing in place of a parent may employ his own child or a child in his custody under the age of 16 years in any occupation other than the following: (a) Manufacturing; (b) mining; (c) an occupation found by the Secretary to be particularly hazardous or detrimental to health or well-being for children between the ages of 16 and 18 years. This exemption may apply only in those cases where the child is exclusively employed by his parent or a person standing in his parents’ place. Thus, where a child assists his father in performing work for the latter’s employer and the child is considered to be employed both by his father and his father’s employer, the parental exemption would not be applicable. The words “parent” or a “person standing in place of a parent” include natural parents, or any other person, where the relationship between that person and a child is such that the person may be said to stand in place of a parent. For example, one who takes a child into his home and treats it as a member of his own family, educating and supporting the child as if it were his own, is generally said to stand to the child in place of a parent. It should further be noted that occupations found by the Secretary to be hazardous or detrimental to health or well-being for children between 16 and 18 years of age, as well as manufacturing and mining occupations, are specifically excluded from the scope of the exemption.