If you are a business owner you may be able to both lower your taxable income and your taxes by hiring your children to work for your business. For 2015 you may be able to pay each of your children up to $6,300 as employees, W-2 income, without them paying any income tax on that income assuming that is the total of their income for the year. There would be no income tax for them because $6,300 is the standard deduction for a single person in 2015. In addition, if your business is setup as a sole proprietor you may not be subject to employment taxes on their income.
If your business is structured as an corporation or partnership with someone other than your spouse you will still have to pay these employment taxes if you pay them through one of these entity types. Keep in mind with a little strategic planning you may be able to avoid these payroll taxes on your children's pay. You can avoid these payroll taxes if your children are under 18 years of age and you pay them out of a sole proprietorship that you report income and expenses for on your personal income tax return on a schedule C. So what you can do is setup a "management company" as a sole proprietorship and pay the management company out of your other business to pay your children out of the sole proprietorship. This adds some complexity and you may have extra payroll service fees but it may be worth it. You would have to measure the added expense and complication against the benefit.
Keep in mind you can pay your kids more than the $6,300 standard deduction which will be subject to income taxes but their tax rate may be less than yours. However, to claim them as exemptions you can not pay them more than half of what their support costs are including housing, food, insurance, clothing, education, etc. Also, they have to do real work for the business.
So employing your kids can result in $6,300 of income tax free income per child plus lowering your taxable income. Lowering your taxable income can affect your tax bracket and possible can help you with the Alternative Minimum Tax. Keeping your income below the Alternative Minimum Tax Exemption for 2015 of $83,400 for a couple filing a joint return can help you avoid additional taxes and help you qualify to take certain tax credits.
Look for another post from me on the Alternative Minimum Tax very soon.
Teaching Business Skills and Mentality
Additionally hiring your kids provides you with incentive to train your children to start thinking about how they can start their own business and help them develop business skills. At a young age you can introduce your kids to selling, marketing, accounting, customer service, purchasing, taxes, etc. and give them an education beyond their peers.
Additionally you can possibly use employing your family members as an opportunity to increase contributions to retirement accounts. Your children may be able to contribute to an IRA tax free adding to amount you can pay and avoid income taxes. There may also be other benefits such as with setting up healthcare insurance for your family. There are interesting strategies too for saving for college and or retirement for your children having them contribute to a ROTH IRA. The details of these strategies would require another post.
For more information on hiring your kids see these articles linked below.