The IRS requires adherence to very specific rules for family employment, and failure to abide by those rules can be costly. On the theoretical side, there is no age limit for a child to be hired by his or her parents’ business. But since the compensation has to reflect actual duties being performed, there are practical limits regarding the age of the child. Only in the most unusual and specific circumstances can children under 14 actually earn income.

As with every aspect of dealing with the leviathan U.S. Tax Code, pitfalls abound, and failure to properly address the rules can bring trouble. We don’t profess to know and understand every detail, as we are not Tax Preparers, CPAs, or Attorneys. However, as Certified Financial Planners®, we are qualified to offer Tax Planning recommendations for you to discuss with your tax professional.

Today’s discussion is limited to personal businesses, owned solely by one or two parents of the child. These entities present specific opportunities for tax-saving employment of young family members, but caution is required to adhere to State and Federal laws and regulations.

Employing your children requires treating them as actual employees. Whatever payroll system is used in your business, your kids need to be enrolled as employees. Critical to success is specifying duties that are applicable to your business, as well as appropriate for young workers.

IRS has specific rules for taxation of family members under 18. Rules can be utilized to increase your business profits, while simultaneously offering the kids valuable experience. Taxation varies according to age, and must be understood by the parents before making any arrangements.

Children under age 14 cannot work any hours, except for occasional exceptions, such as babysitting and newspaper delivery.

Children ages 15 and 16 can be employed, but have strict limits on hours per day or week, and whether school is in session. These rules are published by the IRS, and are further restricted in some States.

Once reaching age 16, but before age 18, children may work unlimited hours, but are expressly banned from certain “hazardous jobs,” as defined by the IRS.

Wages paid to children of a business owner reduce the owner’s taxable income. Each child becomes a taxpayer with a Standard Deduction of $15,000, paying no Federal Income Tax up to that amount. Note that IRS does not require parents to withhold payroll taxes for their children under 18.

Taking advantage of opportunities presented with self-employment by hiring your own children is not without potential pitfalls. Anyone contemplating hiring a child should thoroughly research state and Federal rules. Americans of every age would be better off learning more about the Tax Code.