Are you paying your child an allowance? Don’t! Do this instead.

We all know that giving children chores helps build character and instills a sense of responsibility. For those who can afford it, giving a modest allowance for those chores also allows children to learn the value of a dollar and budgeting. All these traits are important to help shape future functioning members of society. But what if I told you there was a better way? 

Simply paying your child for chores will cost you more money than it should. If you own a business that has employees on payroll, there is a tax maneuver I’m about to share that will allow you to give your children the same amount in allowance they are used to, but at a discount to you. It’s simple. Put them on payroll. This will allow you to reduce your bottom line and reduce your tax liability. For a business owner, this can be your federal tax rate, state tax rate, and self-employment tax. If you were to pay your child $5,000 over the year, that would be a savings of $2,059 or about 42% for a Massachusetts resident in the 22% federal tax bracket. Not bad. 

“But I don’t want to subject my child to taxes on their allowance!” – every parent out there.  

I know.  

That’s the best part.  

You won’t if you pay them under $12,200 for federal and $8,000 for Massachusetts based on current tax law at the time of this post. So, to keep it simple for my Massachusetts clients, keep it under $8,000. They won’t even have to file a tax return at that level of earnings. Also, any child of a family business under the age of 18 doesn’t need to pay social security or Medicare tax on those wages either. Its completely tax free to them and a business expense for you. Win-Win.  

One important aspect of this to keep in mind. You can’t just pay them for nothing. They need to be paid a “reasonable” wage for the work they do for the company. With the technology skills of children these days, that shouldn’t be a problem. Most know how to navigate an iPad by age two, so I’m sure they can help with Microsoft office or even cleaning and organizing around the office. Get creative.  

Bottom line: If you own a business with existing payroll, put your child on payroll instead of a cash allowance. It will save you a lot of money.