Hiring your children in Arizona could provide notable tax advantages. Over the past few years, new changes made by the Internal Revenue Service (IRS) have made this an increasingly attractive prospect. In fact, hiring your children is one of the most straightforward ways to experience tax benefits in Arizona. Family businesses should consider these benefits carefully before helping their children choose summer internships, part-time jobs, and other employment opportunities. To discuss this strategy in more detail, book a consultation with an Arizona business law attorney. Choose Harrison Law, PLLC and call (480) 320-2310 to get started.
What Are the Tax Benefits of Hiring Your Children in Arizona?
The benefits of hiring one’s own children to work in the family business vary depending on the type of industry and the age and expertise of the children. Hiring an accountant in her thirties to manage the books is very different from hiring a teenager to work the front counter, regardless of either individual’s relationship to the business owner. Additionally, some industries may have important safety or security regulations that impact the range of positions for which one’s children, especially younger children just entering their working years, would be appropriate employees. With these caveats in mind, however, there are a few general principles that apply across a wide range of business types and potential family dynamics.
Arizona Businesses May Deduct Child Salary from Business Income
The main benefit of hiring your children in Arizona is simple: You may deduct their salaries from your business income. According to the Tax Foundation, businesses in Arizona may experience various forms of tax. These include:
- 9% corporate income tax
- 6% state sales tax
- 3% local sales tax
- (Alternatively) 8.37% combined local and state tax
By shifting business income to child salary, business owners can avoid these taxes on that specific amount and instead experience tax-free status associated with a child income. A minor child pays zero tax on their income up to a certain amount.
Keeping Money Within the Family
When a business owner hires their own children, they also keep funds within the family. For many entrepreneurs, this may be preferable to paying salaries to non-family members on a purely emotional level. However, there are additional financial benefits to consider:
- You can have your child set aside their salary to a Roth IRA
- You can have your child set aside their salary to a college fund
- You can have your child set aside their salary to start their own business
- You can have your child invest their salary in any other way you see fit
There are many other possibilities. All of these strategies involve shifting money from the business to serve the best interests of the child – whether that involves saving for retirement, college tuition, or any other priority. Perhaps most notably, these funds can be reallocated without incurring any tax penalties. A Roth IRA is especially popular among business owners in Arizona, as there is legitimate growth potential for even a small initial investment during the early working years of a child.
New IRS Changes Make Hiring Your Children Even More Advantageous
A business owner who hires their own children can now expect even greater tax advantages due to recent changes made by the IRS. These changes involve the maximum amount a child can earn without incurring tax obligations. Previously, this amount was approximately $6,300. If business owners paid their children less than this amount, they were able to experience the aforementioned benefits – often without their child having to file a tax return with the IRS.
Recent changes have effectively doubled this amount, allowing business owners to pay their children up to $12,000 while still enjoying all of the above benefits. This is part of the Tax Cuts and Jobs Act (TCJA) of 2017, which was initially put in place by the previous administration. These tax benefits may change in the future, as the TJCA is set to expire by 2026-2027.
Things To Keep in Mind When Hiring Your Children
Business owners who hire their children should keep a number of factors in mind to avoid potential issues with the IRS. Although this strategy has been used effectively by numerous business owners, it also has its fair share of limitations. Here are a few examples:
Hire Children for Jobs They Can Realistically Carry Out
Realistically, a minor child can only carry out certain jobs. They lack the training and experience of other workers, and they may be physically weaker than adults. Because of this, business owners should be careful when assigning work duties to their children. Children hired as Chief Financial Officers may reasonably raise questions with the IRS. Similarly, the IRS may become suspicious when they learn that a 13-year-old girl has been shoveling gravel alongside seasoned construction workers for the entire summer.
Pay Children Appropriately
Business owners should also pay their children appropriately. Wages should reflect the position and duties associated with the job, and business owners should avoid simply paying their child an arbitrary number. Generally speaking, the salary of a child should match that of another employee carrying out similar duties. Paying a child too little may be just as problematic as paying a child too much, although the latter mistake is more common due to the potential tax advantages.
Be Aware That the IRS Scrutinizes Interfamilial Tax Relationships
Rest assured that the IRS will closely examine tax relationships between family members. This is a relatively common tax avoidance strategy, and many business owners take full advantage of it. Some business attorneys in Arizona might even call it a highly aggressive tax strategy, but it is perfectly legal when executed properly. Issues may arise if business owners attempt to engage in clear fraud, such as paying children for work they never carried out, or by attempting to transfer a child’s salary back to their own personal accounts.
Follow Child Labor Laws
Since the employment of a child may be scrutinized by the IRS, it is even more important to follow child labor laws in Arizona. While many business owners can and do hire their adult children to work challenging schedules, a minor child is only permitted to work for a certain number of hours each week, and they may not be allowed to work under certain hazardous conditions. For more information about specific child labor laws and overall tax strategies, consider getting in touch with Harrison Law, PLLC.
Document Child Work History Carefully
Even though a minor child might not be required to file a tax return if they earn under a certain amount, it still makes sense to document their work history carefully. This should include a detailed account of the work hours, their duties, any accident reports, and so on. The IRS may request this documentation as they examine the employment of a child.
Contact a Business Law Attorney in Arizona Today
To assess tax benefits associated with hiring your children and many other potential strategies, consider booking a consultation with Harrison Law, PLLC. Arizona business law attorneys tailor the most appropriate tax strategies based on the specific circumstances of each business. Call (480) 320-2310 today to assess these circumstances and get started.
© 2023 Matthew W. Harrison and Harrison Law, PLLC All Rights Reserved
This website and article have been prepared by Harrison Law, PLLC for informational purposes only and does not, and is not intended to, constitute legal or financial advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction.
