The recent tax reform eliminated personal exemptions for taxable years after December 31, 2017, and before January 1, 2026. This makes your child worthless to you on your Form 1040. But there is a way to get even or, perhaps, much more than even.
Let’s set the stage first. For taxable years after December 31, 2017, and before January 1, 2026, the standard deduction for a single taxpayer begins at $12,000 in 2018 and increases every year for inflation. The new standard deduction means that a single taxpayer such as your child can earn up to $12,000 in W-2 wages and pay not a penny in federal taxes.
As the owner of a business, you have the advantage of being able to hire your child to work in your business, and that creates tax-saving opportunities for both you and your child. The big dollar benefits of hiring your child go to the Form 1040, Schedule C taxpayer and the husband-and-wife partnership because such businesses are exempt from FICA when they employ their children who are under age 18. The parental proprietorship and partnership hiring rules also exempt wages paid to a child under the age of 21 from unemployment taxes.
Keep in mind that the single-member LLC that did not elect corporate tax treatment is taxed as a sole proprietorship for federal tax purposes.
Example. You employ your 9-, 11-, and 13-year-old children to work in your proprietorship. You pay them a fair market wage for the work they perform, and that just happens to equal $12,000 per child and total $36,000 for the year.
Children’s federal taxes. Zero! The $12,000 standard deduction zeroed each of the children out of federal income taxes for the year.
Your federal taxes. You claim the $36,000 W-2 wages deduction on your Schedule C, where it reduces both your income taxes and your self employment taxes.
The S and C corporations and the non-spouse partnerships do not qualify for this benefit. They have to pay the payroll taxes on all employees—period. There is no parental benefit. This changes the game, obviously. But in most cases, it actually works out pretty well.