The child tax deduction laws can be used to reduce your tax bill by “employing” your kids in your business. Kids here refer to minors between 7 to 17 years of age. Hiring your children not only makes them smarter, but also saves you a lot of tax money!
As a rule, every child has a standard deduction of $4,570; thus it follows that children are exempted from paying the first $4,570 in income. Now, a child hired in your business is paid the amount, which is deducted from your business accounts. The amount can be spent by the child (or by you), and the icing on the cake is that you save $1,425 in taxes (if you are in the 30% tax bracket)
Interestingly, you are cleared from paying social security tax on the “wages” that you pay the child if your child is a minor and if you reimburse them out of a sole proprietorship or partnership. Social security taxes are levied if, and only if, the wages come out of a corporation. You do have to do some paperwork to avail this benefit. Form 941 is to be submitted four times in a year. This is basically a form used to withhold finances generated by an employee; however, for a child there will be no withholding. Further, at the end of the year, you will have to issue a W-2.
Kids are legally allowed to be hired as employees by their parents when they are 7 years old, provided that the work assigned to them is not mentally and physically challenging, and is within their means to achieve it. The number of hours and the type of assignments completed by the child should be recorded on an Excel Sheet. As long as the pay and the work given to the child are reasonable, you can avail of the tax deduction.
The wages given to your kids do not go into their piggybanks, but into your bank. The money can, and will, be spent only with your approval on the necessary clothes, education, toys, and so on.
Finally, the most important record to keep is to make sure that your kids do not pay for more than 49% of their expenses. Their total expenditure thus needs to be tracked at all times, because if they cross the 50% mark, then you end up losing them as an itemized deduction on your personal return.
