Minnesota business owners often ask about hiring their children as a tax strategy. When done correctly, this can provide significant tax benefits while teaching children valuable work skills. However, strict IRS requirements must be met to ensure legitimacy. As Minnesota small business accountants specializing in family-owned businesses, we help contractors and home service professionals implement these strategies properly.
Federal Requirements:
Minnesota Specific Considerations:
The work must serve a genuine business need:
Wages paid to children are fully deductible business expenses, reducing:
Example: A contractor paying their 16-year-old $6,000 annually saves approximately $918 in federal income tax (15.3% SE tax) plus income tax at their marginal rate.
Sole Proprietorship Benefits:
Corporation/Partnership Limitations:
For 2024, children can earn up to $14,600 in wages before owing any federal income tax, thanks to the standard deduction.
Tax-Free Income Strategy:
Children with earned income can contribute to Roth IRAs:
Long-term Wealth Building: A $6,000 annual Roth IRA contribution from ages 16-18, growing at 7% annually, could be worth over $1.3 million by age 65.
Companies like Country Creek Builders and CBC Twin Cities can employ children for:
Businesses like Fredrickson Masonry might utilize children for:
Companies such as Minnesota Landscapes and Preferred 1 could employ children for:
Maximum Tax Benefits:
Limited Benefits:
Standard Employment Rules:
Tax Election Dependent:
Maintain thorough records including:
Document that work assignments are:
Wages must be reasonable for:
Example Wages for Different Ages:
Common audit triggers include:
Start with limited responsibilities:
Examples of legitimate integration:
Missing Records: Failure to maintain time sheets, job descriptions, or performance documentation
Inconsistent Documentation: Records that don't match claimed hours or work performed
Informal Arrangements: Treating child employment casually without proper business formality
Above-Market Wages: Paying significantly more than comparable employees
Retroactive Payments: Making large lump-sum payments without corresponding work periods
Gift Disguised as Wages: Using employment to transfer money without legitimate work
Child Labor Violations: Assigning age-inappropriate or hazardous work
Tax Filing Errors: Incorrect payroll tax treatment or reporting
Business Purpose Failure: Work that doesn't serve legitimate business needs
Coordinate with education planning:
Consider broader family tax planning:
Work Permit Requirements:
Hour Restrictions:
State Income Tax:
Partner with Minnesota CPAs who can:
Consider how child employment fits with:
Maintain comprehensive files including:
Be prepared to demonstrate:
Hiring your children can provide significant tax benefits for Minnesota business owners while teaching valuable work skills and creating long-term wealth-building opportunities. Success requires careful planning, proper documentation, and strict compliance with employment and tax laws.
Ready to explore whether hiring your children makes sense for your Minnesota business? Contact our tax planning specialists who work with family-owned businesses throughout Minnesota. We'll help you structure legitimate employment arrangements that maximize tax benefits while ensuring full compliance with all applicable laws and regulations.
Your family's financial future starts with smart planning today – let us help you implement strategies that benefit both your business and your children's long-term financial success.
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