Thanks to the Tax Cuts and Jobs Act (TCJA), if you are operating a small business as a sole proprietorship or a single-member LLC that is treated as a sole proprietorship for tax purposes, you can hire your child under the age of 18, as a legitimate employee. His or her wages will be exempt from Social Security tax, Medicare tax, and federal unemployment (FUTA) tax. In fact, their wages are exempt from FUTA tax until they reach the age of 21. You can hire your child part-time or full-time. (Publication 929, Tax Rules for Children and Dependents)

Under the TCJA, your child employee can use their standard deduction to offset up to $12,000 of 2018 wages paid by your business from their federal income tax. For 2017, the standard deduction was only $6,350, but the TCJA nearly doubled it because of the increase in the standard deduction. Therefore, under the new law, hiring your child is a good idea. In addition, you can claim them as a dependent on your return. 
 
For 2018, your child will owe nothing to the IRS on the first $12,000 of wages unless the child has income from other sources. Your child can then set aside some or all wages and contribute money to a Roth IRA or a college fund.
 
When hiring your child, you need to be careful to treat them like any other employee. This includes items such as:

  • Maintaining detailed employment records including Job description, Forms W-4, Form I-9, hourly time and attendance tracking, and a description of work performed.
  • Your child is required to receive a Form W-2 for work performed.
  • Ensuring the services provided do not include typical household chores.
  • The wage calculation should correspond to similar services provided by an arms-length employer. 
  • Issuing paychecks as you would a normal employee (e.g., weekly, bi-weekly, etc.)
  • Documenting that the services are legitimate and considered ordinary and necessary for the business. 

In the 2014 Tax Court Decision Patricia D. Ross v. Commissioner, TC Summary Opinion 2014-68, the decision stated… Read more