How to Hire My Kids in an S Corp

hello hello everyone Jamie troll here your favorite CPA and profit strategist and today we're going to be talking about how to hire your kids in an S corp and it's important that we talk about specifically an S corp because it is a little bit different than perhaps different entities so if you're a sole proprietor or an LLC who has not elected to be taxed as an S corp it's a little bit more straightforward to hiring your kids with an S corp or a C Corp or potentially a partnership it's a little bit more complicated but you absolutely still can do it so that's the question I get all the time is can I still do this can I still get the tax benefits can I still hire my minor child if I am an S corporation and the answer is yes I actually have an S corporation Myself by primary business is an S corporation however I am able to still hire my child get all of the tax benefits and employ him even though he's only nine years old obviously he does very age appropriate work in my business he doesn't work a ton but he does like to help me out he does come on this YouTube channel from time to time and so I get to pay him to be able to do that and I also get to put money into his Roth IRA that I've opened for him because he has earned income so I'm already setting him up for his financial future which is an amazing thing to do so we have lots of conversations about money if you want to check out a couple of weeks ago I did a video where him and I literally sat down and talked about money and financial literacy and the conversations that I have with him so if you're wondering how to talk to your kid that's a great place to start now before we get into all the specifics about how to hire your kid in your S corporation importantly let's talk about what an S corporation is and why it differs a little bit from a sole proprietor or an LLC so when you elect to be taxed as an S corporation that means that you essentially are now an owner of that Corporation and you're probably paying yourself via payroll and you may be paying other employees as well potentially and then you also are probably taking some form of owner draws or have some profit above and beyond your payroll that profit that owner draw that you're taking is going to be taxed at a preferential rate you are going to be saving Social Security and Medicare taxes on that amount because only your salary is going to have those amounts taken out so you have income taxes on all of your income but you only have those Social Security and Medicare I.E FICA taxes or payroll taxes are called all different kinds of names but it's the same thing you only have that on your salary not on your owner draws if you are an S corp it's different if you're a sole Pride or LLC but if you're an S corp that's how it works so the other thing that we want to talk about really quickly before we jump in just to make sure everybody's on the same page is whether you can even hire a minor child meaning a child under 14 or 16 years old because of child labor laws and the answer to that is you actually can if you are the owner of your business then yeah yes you can employ your child to work within your business at any age so here's an excerpt from the Department of Labor website that says that family businesses are basically an exemption now you're not exempt from all the child labor laws but you are exempt at least from the minimum age requirement for a child working in your business if that business is owned by the parent which includes s-corporations so now that we know it's legal to hire your child at basically any age that you want to again assuming that they have an actual job that they are able to do in your business which could be modeling or social media or any number of different things cleaning your office administrative work there are lots and lots of different options that your child could do depending on their age and the things that they enjoy and are good at but now that we know that yes you can hire them it is okay to do that you're not violating any kind of federal child labor laws by doing that we then need to talk about what the best way is to do it so can you hire your child directly through your S corporation yeah you can but I wouldn't and the reason that I wouldn't is because you lose a lot of the benefit of hiring your child when you employ them directly by your S corporation and that is because there are certain exemptions to taxes that are available to entity types that are llc's not s Corps or sole Proprietors okay so if you've elected to be taxed as an S corporation or maybe you're a C corporation then these don't apply to you these exemptions for taxes don't apply to you what are those exemptions for taxes well I will show you directly on the IRS website so you can see here on the IRS website there is a whole section about children employed by their parents and it says that if the business is a parent's sole proprietorship or a partnership in which each partner is a parent of the child now silver ridership here also is going to include llc's that have not elected S corporation because those are taxed the same so that's important to clarify because I know that's not always super clear when we're talking about entity types so in that case it says payments for the services of a child are subject to income tax withholding regardless of age we're gonna talk about that here in a minute but yes they will be subject to income tax taxes but there are some ways around that too but the second part is where you really want to focus in it says payments for services of a child under age 18 are not subject to Social Security and Medicare taxes if the child is 18 years or older then payments for these services this child are social security and Medicare so if they're under 18 no social security and Medicare if they're employed directly by a sole proprietorship or an LLC and then the last one says payments for services of a child under age 21 are not subject to Federal Unemployment Act tax so that means you don't have to pay any future tax at all if your child is under 21. so the taxes they have to pay depend on their age if they're under 18 there are no social security Medicare or unemployment taxes if they're under 21 there are no unemployment taxes but if you keep on reading you're going to see a little bit more so if the business is a corporation a partnership unless each partner is a parent of the child or an estate then you'll go on to read that payments for services of a child are subject to income tax withholding well we already knew that that's true for everybody Social Security taxes Medicare taxes and future taxes regardless of eight so that sounds pretty dang discouraging doesn't it when you read that it sounds like uh oh great now that I'm an S corp I'm missing a lot of the benefits that I could have by hiring my minor child but you're in luck my friend because I'm going to tell you the I won't call it a loophole because it really isn't it's a fully fully available to anyone strategy that you can use to still employ your children legally fully fully legally and they can save on taxes now real quick to talk about income taxes this said that yes your child is going to have to pay income taxes or be subject to withholding for income taxes is the way that it's worded regardless of their age and regardless of the fact that you are employing them in your own business however remember that your child is going to be taxed at their rate your child's income does not roll into your tax return they have their own taxes that they would have to pay now if you are going to be paying them occasionally right if you're not going to be employing them full-time which would be pretty difficult to do with a minor child right then you can pay them up to thirteen thousand eight hundred and fifty dollars a year with the zero dollars in federal income tax on that and the reason that you can do that is because that is the current standard deduction for a single filer so 13 850 the tax rate on that is zero percent they make a little bit more than that they're only going to be taxed on the amount that they are paid above that and it'll still be at a pretty low rate probably quite a bit lower than the rate that you would have to pay on that income so why yes technically you still have income tax withholding potentially on this in a lot of cases your kid isn't gonna have to pay any income tax at all on the amount that they make and remember those standard deduction amounts change every single year so check what it is just go into Google and put standard deduction single filer 2020 whatever 2024 2025 whatever year you're watching this and it's going to give you the current standard deduction amount for the IRS so that's great for income taxes but what about these pesky Social Security Medicare and unemployment taxes so why is it that Sole proprietorships and non-corporations get to have these great benefits where their kids don't have to pay those but if you have an S corporation or a C corporation then your kid does that doesn't seem really fair does it it's kind of silly I agree but that's just how the rules are written however however the way around this is to create a family management company now this is not some kind of crazy you know thing that's going to get you audited right these are very very common to create family management companies what the heck is a family management company well it's basically an LLC or a sole proprietor that you set up that is not going to be taxed as a corporation and is going to serve as the management company they're going to manage essentially your children on payroll so the entire purpose of that entity it's almost like just a holding company and it is basically going to be responsible for managing the work that is done by your child so you do have to go and set up a new entity for this again can be a sole proprietor it can be an LLC you're going to want to go and get an EIN and really actually create what this is you can call it whatever you want I call mine the troll management company so whatever you want to call it you can call it and ultimately the entire role of that is going to be to manage your kid and you as the parent are going to be the sole owner of that so this is the way that you will be able to pay them and remember if you're paying them from a sole proprietor or an LLC then you don't have social security Medicare or unemployment taxes if they're under 18 or you don't have unemployment taxes if they're under 21 and it's really worth the extra step and the little bit of extra work if you know what you're doing to set this up properly so how exactly does a family management company work well the way that that's going to work is that it is going to track all the work done by your child so that management company I eat you right is going to keep a Tracker keep a log where you are logging everything that your kid does in your business and the amount that you're paying them for that work and the dates that you did it and everything else and then what's going to happen is it's actually going to invoice your S Corp for that amount so again it's kind of like this pass-through entity so you've got this entity you set it up you get a bank account for it and then you invoice your S corporation in this instance for the amount that you're going to pay your child plus any other fees like potentially payroll fees if you're paying for a payroll provider or something like that so your are going to invoice the S Corp the S Corp is going to pay the family management company and then the family management company is going to pay the child and again any potential other expenses that they may have related to that payroll now you might be wondering is this really worth it I already have payroll set up for my S corporation can't I just put my kid on that payroll and make it a lot easier well let me put some numbers to this because I always think that that's helpful to figure out whether it's worth jumping through a few little Hoops in order to do this the best way possible so here's what you're going to want to do let's say that you have a profitable business and you're trying to decide between option A which is to do nothing and just not hire your kid not pay them anything and instead let that money flow through as your profit and be taxed on that right that's option a option b is you hire your child directly through your S corporation or option C you set up a family management company and pay your child through that so let's look at option A let's just say we're going to use that 13 850 as an example here to say if you were to decide to max out what you could pay your child without any taxes at all without any income taxes that would be that 13 850 which is the standard deduction that 13 850 if you went with option A and just let that flow through as profit in your business depending on your effective tax rate you would be taxed probably somewhere between five and six thousand dollars now let's move to option b which is employing your child directly through your S corporation if you do that they have a zero percent tax rate for income taxes right because they are going to just be using that standard deduction and they will however have to pay social security and Medicare as will you have to pay the employer portion and you'll also have to pay that federal unemployment so all together those taxes are going to end up being about twenty five hundred dollars so still less than what it would have been for you uh less than half actually of what you would have had to pay if it was your profit if you gave it to your kids so that's great you're already shifting that income into a lower tax bracket however if you go with option C and do a little bit of extra work set up that family management company and pay them through that that same 13 850 would be tax free assuming they were under 18. so that means zero dollars in taxes so option A you're paying five to six thousand dollars in taxes option b you're paying about twenty five hundred dollars in taxes or option C you're paying zero dollars and they're paying zero dollars in taxes how amazing is that so when you look at it that way you could see that maybe a little bit of effort can go a very long way now it probably goes without saying but I'm gonna say it anyway that there are a lot of things that you want to make sure that you get right in this and a lot of people do this the wrong way so when you are trying to set this up you want to make sure that you have all the proper a documentation that you need all the proper contracts that you need everything you need to make sure that you are doing this by the letter of the law because what you don't want is the tax man to come in later on someday and say you didn't do this correctly now you owe me a bunch of money so if you want to do this the right way then I actually have created a whole tool kit just for people like you it's called the hiring your kids toolkit we are just now launching this it is out for pre-sale right now as I'm recording this I don't know if our pre-sale is still going on when you're watching this but regardless go check it out Jamie troll.com forward slash kids and go see all the things that we have to offer because within this toolkit it's literally the A to Z we have checklists we have guides we have worksheets we have contract templates we got it all there are video lessons to explain this in more detail and we specifically have a video Lesson just for setting up a family management company and a guide just for that and we talk about how to even go further and open up a Roth IRA for your child so that you can make them a millionaire off of only a few thousand dollars that you might be putting in now I promise you it's possible we have a calculator in there that shows you how so if you want to set your kid up for their financial future and you want to save on taxes this is the perfect opportunity for you and I want you to go grab it okay I want you to go grab it so you have all the tools to do this and to do it right thank you so much for joining me go check out some of my other videos about hiring your kids like the myths video I did last week which is super helpful as well and go check out the hiring your kids toolkit which is available now see you soon

Channel: Jamie Trull

Views: 7,169

Keywords: How to Hire My Kids in an S Corp, s corporation, s corp, how to hire your kids, how to hire kids in an s corp, family management company, hire your kids, hire your kids tax strategy, how to hire my kids, hire your children, tax strategy, s corp taxes, generational wealth, hire children tax, myths for hiring kids, can I hire my kids, how to hire your children, hire children for tax savings, kids tax savings, hire kids tax strategy, jamie trull

Id: tUI07wut7as

Length: 15min 48sec (948 seconds)

Published: Tue Jun 27 2023