Mark Kohler shows how sole proprietors can legally hire their kids and deduct wages as a business expense. Children under 18 don't owe FICA taxes, so no W-2 is required if they're below the standard deduction. Report the payments on Schedule C under "outside labor" and have the child open a bank account to receive the transfers.
Chapters
How do I hire kids as a sole proprietorship? And where do I write it off? Now remember, when you say I have a sole proprietorship, that's not rental property, that's Schedule E. So when they say sole prop, that means they have a side hustle. A lot of sole proprietors, they're just a dba. You don't have an llc. I might recommend that you get an llc. But let's just deal with this. You're a sole prop. You're going to be filing a Schedule C. Any small business, that money comes in here as a sole prop and you report it on schedule C. Then it goes to schedule one and then it drops onto your 1040. That's how it works. So if you're going to hire your kids, your kids have to have a bank account. So let's say you've got two kids here. Here's their bank account. And you're going to transfer money from the business into their bank account and then pay for soccer, school clothes, school lunch, college savings, Roth IRA or Coverdell or whatever. It doesn't even have to go into savings. But you may just say, I just need to pay for this stuff. Quit taking money and paying for it. No more. You're not going to do that. You're going to pay the kids and let them pay for their own expenses. That's what we're shooting for here. When your money comes in, you're going to put it on page two, a Schedule C, page one and two. Right here on the page two is called other expenses. And that's where you're going to put kids and call it outside labor. Do not put it on payroll on page one, because you're not going to withhold taxes. You don't have to withhold taxes on your kids under age 18. That's why you don't need to do a W2. There's no FICA withholding. And if they're below the standard deduction, there's no federal withholding. Now, if you're in a state and you're going to pay more than the state withholding, you might do a W2 just to kick out some state withholding.
