If You’re Self-Employed, Hire Your Child in your Business

You can hire your child and compensate them for their labor.  If your child is under age 18, and your business is not a C Corp or an S Corp, then the wage payments to the child are not subject to employment taxes.  When you pay the child, you will be deducting the payment at your higher tax rate (assuming 33% Federal and 4.3% Indiana) and the child will be taxed on the payment at their lower tax rate (which likely will be 0% for Federal and 4.3% Indiana).

Suppose it is time for the child’s first car which costs $6,000.  You employ your child, pay him $6,000, and deduct it.  Child then pays close to $0 tax on the $6,000 of wage income and uses the money to buy a car.  You have effectively deducted the cost of your child’s car – a personal expense – in your business.

If the child does not need to spend the money, then the money can be put into the child’s ROTH IRA to grow tax free for a very long time.  You have essentially created a deductible ROTH IRA contribution.  $5,000 put into a ROTH IRA when the child is 18 will be worth $212,000 when the child turns age 65 if growing at 8% per annum.