š„ø Paying your child for legitimate work can reduce taxable income, saving thousands in taxes.
š§ Wages paid to children under 18 may be exempt from Social Security, Medicare, and FUTA taxes in unincorporated businesses.
š° Children can earn up to $14,600 in 2024 without owing federal income tax, maximizing tax savings.
Did you know that hiring your kids for your business could help you save up to $12,000 annually in taxes?6* This little-known tax strategy can make a significant difference in reducing your taxable income while teaching your children about financial responsibility and entrepreneurship. If you're a business owner, this is an opportunity you don't want to miss.ā
At Modak Makers, we offer a reliable and effective solution to streamline this process. Our app offers a secure bank account and a VisaĀ® Debit Card for kids1, making it easy for parents to transfer wages directly to their children's accounts. Letās explore how this tax-saving strategy works and how Modak can simplify it.
**The information provided is for general informational purposes only and is not intended as tax advice. It is not coming from a tax professional or consultant. We recommend reaching out to a qualified tax professional to ensure that the strategies discussed are applicable to your specific situation and to obtain personalized advice based on your individual circumstances. Always consult a tax expert to ensure compliance with current laws and to make informed decisions.
One of the most significant tax benefits for business owners who hire their kids is the ability to deduct their wages as a business expense. This reduces your taxable income, potentially saving thousands of dollars annually.
For example, if you own a sole proprietorship or an LLC, you can pay your children for legitimate work they perform for your business. Common tasks might include:
Example: If you pay your child $12,000 annually, thatās a direct reduction in your taxable income. If youāre in the 24% tax bracket, thatās a $2,880 tax savings.*
*Actual savings depend on individual tax circumstances.
Another potential benefit is that wages paid to children under 18 may be exempt from payroll taxes in certain situations. If your business is unincorporated (such as a sole proprietorship, a partnership owned by both spouses, or a single-member LLC), you may not need to withhold Social Security, Medicare, or Federal Unemployment Tax (FUTA) for your childās wages. However, this exemption only applies when the business is structured in these specific ways, and the childās work is legitimate and meets the IRS guidelines.
By paying your children, you may be able to shift income from your higher tax bracket to your childās lower tax bracket, which could lead to tax savings. For example, if you're in the 24% tax bracket and your child is in the 10% bracket, shifting some of your income to them might reduce your overall family tax burden. However, this strategy must meet the IRS's guidelines regarding the childās work, the wages being paid, and their age.
Example: If you pay your child $10,000 and they are in the 10% tax bracket, this could shift that income from your higher tax bracket (24%) to your childās lower bracket, resulting in a tax saving of $1,400. But itās crucial to ensure that the payment is reasonable for the work done, and the income is taxed according to applicable laws.
Important Note: These benefits are subject to specific requirements and may not apply in every situation. Itās important to consult a tax professional to ensure that these strategies are applicable to your unique circumstances and comply with current tax laws.
For 2024, the standard deduction for single filers is $14,600. This means your children can earn up to this amount without owing any federal income tax. By paying them for legitimate work in your business, youāre maximizing your tax savings while helping your kids build their financial future.
Example: If you pay your child $12,000 and they have no other income, they wonāt owe any federal income taxes.
Earning their own money teaches kids the value of hard work and financial independence. They learn how to manage their finances, save for their goals, and make responsible spending decisions.
Example: Your child can use their Modak VisaĀ® Debit Card1 to pay for school supplies, extracurricular activities, or personal expenses, all while learning to manage money.
š³ Ā Provides secure accounts and VisaĀ® Debit Cards, making it easy to manage and transfer wages to kids.
š±Parents can track spending, automate payments, and encourage savings goals through Modakās app.
š° Promotes financial literacy with rewards, challenges, and tools that teach kids money management.
Children with earned income can contribute to retirement accounts such as a Roth IRA. Starting early allows them to benefit from compound growth over time, setting them up for long-term financial success. Keep in mind that investment returns are subject to market fluctuations, and parents or guardians play a key role in setting up these accounts.
Example: A $2,000 annual contribution to a Roth IRA starting at age 14 could grow to over $500,000 by retirement age, assuming a 7.00% annual return.**
Involving kids in your business helps them develop an entrepreneurial mindset. They learn valuable skills like problem-solving, time management, and customer service, which will serve them well in their future careers.
Example: Assigning your child tasks like creating social media content or managing inventory can teach them practical business skills.
To qualify for these tax benefits, your business must be structured correctly. The primary structures that qualify include:
Corporations must follow different rules and may require additional structuring to achieve the same tax benefits.
Note: If you have an S Corporation, you may need to set up a family management company to pay your children without triggering payroll taxes.**
The IRS requires that children perform legitimate work for the business. This could include tasks such as:
Example: Your child cannot be paid for simply being your child. They must perform actual work that benefits the business.
Keep detailed records of the hours worked, tasks performed, and wages paid to your children. This documentation will help substantiate your claims in case of an IRS audit.
Checklist:
While a bank account isnāt legally required to pay your children, having one makes managing their earnings easier. Thatās where Modak comes ināour app provides accounts and VisaĀ® Debit Cards specifically designed for kids and teens.
Example: Modak's account setup generally takes just 5 minutes, making it easy for parents to help set up an account for their kid.
With Modak, parents can track their childrenās spending and manage payments easily. You can set up chore payments, contribute to savings goals, and even allow your kids to create payment links to get paid for gigs.
Example: Your child can create a payment link to receive payment for tasks completed for a family business.
Modak promotes financial literacy through its in-app features. Kids can set savings goals5, complete challenges, and earn MBX points2, which can be converted into real money. This gamified approach makes learning about money management fun and engaging.
Example: By walking 5000 steps daily, kids can earn up to 70 MBX points per week, equivalent to $0.70.3
Parents can seamlessly transfer wages to their kidsā Modak accounts. With options like direct deposit, debit/credit card funding, and Apple Pay, Modak makes it simple to manage family finances.
Example: Parents can use Modakās chore payment feature to automate wage transfers.
Letās look at a hypothetical case study:
Scenario: John owns a small marketing agency and decides to hire his 14-year-old daughter, Emma, to help with social media content and office tasks. He pays her $10,000 annually for her work, which he deposits into her Modak account.
Tax Savings: John deducts the $10,000 as a business expense, reducing his taxable income. Additionally, Emmaās earnings fall below the standard deduction limit, meaning she doesnāt owe any federal income tax.
Financial Education: Emma uses her Modak VisaĀ® Debit Card to manage her expenses, contribute to her savings goals, and earn MBX points by completing challenges and walking 5000 steps daily.
Yes, businesses must comply with IRS guidelines for tax exemptions, which include meeting eligibility requirements and maintaining proper documentation. We recommend consulting a tax professional to ensure compliance with your specific situation.
Businesses may qualify for tax exemptions on wages paid to their children under 18, including exemptions from Social Security, Medicare, and FUTA taxes for unincorporated businesses. However, we recommend consulting a tax professional to confirm how these exemptions apply to your specific situation.
Hiring your kids for your business is a win-win strategy. It allows you to save on taxes while teaching your children valuable financial and entrepreneurial skills. Modak makes this process even easier by providing secure accounts, VisaĀ® Debit Cards, and financial literacy tools for kids and teens.
By using Modak to pay your kids, youāre not just simplifying family financesāyouāre teaching valuable money management skills and encouraging financial habits that can benefit your family for years to come.
Open a Modak account today and start building a financially savvy family!
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* Actual tax savings vary based on individual circumstances and compliance with IRS regulations
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