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Big Tax Breaks for Hiring Your Children in the Family Business
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Article Highlights: Child Under the Age of 19 or a Student Under the Age of 24 Kiddie Tax Tax on a Child’s Earned Income Deduction for the Business Employment Taxes IRAs and Retirement Plans With jobs at a premium during the COVID-19 pandemic, you might consider hiring your children to help out in your business. Financially, it makes more sense to keep the family employed rather than hiring strangers, provided, of course, that the family member is suitable for the job. Note, however, that wages paid to children and other relatives aren’t eligible for the Employee Retention Credit created by Congress in 2020 as part of the COVID-19 emergency relief measures for employers. Rather than helping to support your children with your after-tax dollars, you can instead hire them in your business and pay them with tax-deductible dollars. Of course, the employment must be legitimate and the pay commensurate with the hours and the job worked. The following are typical situations encountered when hiring family members. Employing a Child – A reasonable salary paid to a child reduces the self-employment income and tax of the parents (business owners) by shifting income to the child. When a child under the age of 19 or a student under the age of 24 is claimed as a dependent of the parents, the child is generally subject to the kiddie tax rules if their investment income is upward of $2,200. Under these rules, the child’s investment income is taxed at the same rate as the parent’s top marginal rate using a lower $1,100 standard deduction. However, earned income (income from working) is taxed at the child’s marginal rate, and the earned income is reduced by the lesser of the earned income plus $350 or the regular standard deduction for the year, which is $12,400 for 2020. Assuming that a child has no other income, the child could be paid $12,400 and incur no income tax. If the child is paid more, the next $9,875 he or she earns is taxed at 10%. Example: Let’s say you are in the 24% tax bracket and own an unincorporated business. You hire your child (who has no investment income) and pay the child $16,000 for the year. You reduce your income by $16,000, which saves you $3,840 of income tax (24% of $16,000), and your child has a taxable income of $3,600, $16,000 less $12,400 standard deduction, on which the tax is $360 (10% of $3,600). If the business is unincorporated and the wages are paid to a child under age 18, he or she will not be subject to FICA – Social Security and Hospital Insurance (HI, aka Medicare) – taxes since employment for FICA tax purposes doesn’t include services performed by a child under the age of 18 while employed in an unincorporated business owned by the parent. Thus, the child will not be required to pay the employee’s share of the FICA taxes, and the business won’t have to pay its half of these payroll taxes either. In addition, by paying the child and thus reducing the business’s net income, the parent’s self-employment tax payable on net self-employment income is also reduced.
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Tax and Financial Insights
by NR CPAs & Business Advisors
2026 IRS Mileage Rates: Key Updates and Insights
The IRS has rolled out the inflation-adjusted mileage rates for 2026, offering taxpayers an efficient way to claim deductions for vehicle-related expenses incurred for business, charity, medical, or moving purposes. These adjustments reflect the continued economic shifts impacting car operation costs.
Effective January 1, 2026, the new standard mileage rates are established as follows:
- Business Travel: Increased to 72.5 cents per mile, inclusive of a 35-cent-per-mile depreciation allocation. This marks a rise from the 70 cents per mile rate set for 2025
- Medical/Moving Purposes: Reduced slightly to 20.5 cents per mile, down from 21 cents in the previous year, reflecting the variable cost considerations.
- Charitable Contributions: Consistent at 14 cents per mile, a fixed rate unchanged for over a quarter-century.
As is typical, the business mileage rate considers the integral fixed and variable costs of automobile operation. Meanwhile, the medical and moving rates remain contingent on variable expenses as determined by the IRS study.
It is critical to note that the One Big Beautiful Bill Act (OBBBA) held firm on disallowing moving expense deductions except for specific cases within the Armed Forces and intelligence community, marking a substantial shift since 2017.
When engaging in charitable work, taxpayers might opt for a direct expense deduction over the per-mile method, covering gas and oil costs. However, comprehensive upkeep and insurance costs are non-deductible expenses.
Business Vehicle Use Considerations: Taxpayers can alternatively compute vehicle expenses using actual costs, which might benefit from shifting depreciation rules, particularly through bonuses and first-year advantages. Keep in mind, however, reverting from actual cost calculations to standard rates in subsequent years is restricted, particularly per vehicle protocol and when exceeding four vehicles in concurrent use.
Additionally, parking, tolls, and property taxes attributable to business can be deducted independently of the general rate, an often-overlooked advantage by many business owners.
Tax Strategies for Employers and Employees: Reimbursements based on the standard mileage framework, providing the right documentation is in place, remain tax-free for employees. Meanwhile, the elimination and continued prohibition of unreimbursed employee deductions continue, with particular exceptions offered to qualified personnel across specific occupations.
Opportunities for Self-employed Individuals: Entrepreneurs remain eligible for deductions on business-related vehicle use via Schedule C, with potential to account for business-use interest on auto loans.
Heavy SUVs and Deduction Advantages: Heavier vehicles exceeding 6,000 pounds but under 14,000 pounds open opportunities for substantial tax deductions through Section 179 and bonus depreciation avenues. The lifecycle of such a vehicle bears implications on recapturing initially claimed deductions, urging cautious tax planning.
For professional guidance on optimizing your vehicle-related tax deductions and understanding their implications on tax strategies, contact our office in Coral Gables, Florida, where expert advice and strategic insights are just a call away.
Educator's Deduction Reform: Key Changes Under OBBBA
The One Big Beautiful Bill Act (OBBBA) introduces significant enhancements for educators' tax deductions starting in 2026, offering both strategic opportunities and planning considerations for educators who qualify. With the reinstated itemized deduction for qualified unreimbursed expenses, educators have a broader spectrum of financial relief. This is complemented by the retention of the $350 above-the-line deduction, allowing educators to maximize their tax benefits by selectively allocating expenses between these avenues.
Understanding the nuances of these changes is crucial for educators and financial advisors alike. The dual-option deduction strategy can potentially enhance tax efficiency, thereby aligning with broader financial planning goals.
At NR CPAs & Business Advisors, based in Coral Gables, Florida, our expertise in tax preparation and planning provides invaluable support to educators navigating these changes. Our comprehensive approach, combined with personalized advice from our experienced team, ensures compliance and optimization in line with the latest tax legislations.
Given these updates, it is imperative to engage with seasoned professionals to fully leverage your deduction strategies. Contact us today to streamline your tax planning under OBBBA's new guidelines and maximize your deductions for upcoming tax years.
