You can save money on your taxes by hiring your minor children. For tax year 2024, your child under 18 can earn up to $14,600 working in your business before any federal tax needs to be paid on the earned income. This amount can be increased to $21,600 if a $7,000 traditional IRA is funded in the child's name for tax year 2024 ($7,000 is the traditional IRA contribution limit for a person under 50 for tax year 2024 ).

While your child earns tax-free income, you save tax dollars by deducting the wages paid. For example, if the business owner is in 22% tax bracket then $4,752 in Federal tax plus self-employment tax of $3,052 is saved by hiring your minor child (using the above example in which the child was paid $21,600).

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Rules to follow:

To take advantage of these savings, make sure you take the following steps to prove you are entitled to the deduction:

• The work must actually be done.

• The work must be related to your business.

• The child must be capable of doing the work.

• The amount paid for the work being done must be reasonable.

• The amount must be distinguishable from an allowance.

• You must keep careful written records of the payments made and duties performed

and file all of the necessary paperwork as described below.

Necessary paperwork:

• Make a written employment agreement between your business and your child containing description of services, amount and timing of compensation. Have all parties sign.

• Obtain a Federal Employment Identification number. You can register at irs.gov. Make sure you check the box that your tax liability will be under $1,000 to be an annual filer.

• Obtain a state employer identification number.

• Verify compliance with immigration laws by keeping a signed Form 1-9 on file.,

• Have each child file Form W-4 and indicate the child is exempt from withholding by writing "exempt" under line 4c if you are planning to pay the child under $14,600. Keep the W-4 on file.

• Keep time cards on file with hours worked. Your children under 18 are exempt from FICA and Medicare. So you will not have to deduct any withholdings. Remember to pay them at regular, timely intervals, and keep a daily list of duties performed.

• File a quarterly Federal withholding return if you did not elect to be an annual filer.

• File a state withholding report if it is required by your state.

• At the end of the year, file forms W-2 and W-3 for your employees.

• File an annual Federal unemployment return on Form 940 indicating your child is exempt by completing line 4 and checking 4e.

• File a state reconciliation of tax withheld if required.