You can save money on your taxes by hiring your children. As long as they're doing legitimate work for your business, you can hire your child tax free and pay each of them up to $12,000 per year tax-free. While your child earns tax free income, you save tax dollars by deducting the wages paid. For example: In a 25% tax bracket, $2,700 in Federal tax plus $1,526 in self- employment tax is saved by paying a wage of $10,800 to your minor child.

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To take advantage of these tax savings, you must be careful to make sure you take the following steps to prove you are entitled to the deduction.

- The work must actually be done.

- The work must be related to your business.

- The child must be capable of doing the work.

- The amount paid for work done must be reasonable.

- The amount must be distinguishable from an allowance.

- You must keep careful written records of payments made and duties performed and file all of the necessary paperwork within the package below.

Make a written employment agreement between your business and your child. Obtain a federal employer identification number. See Form SS-4.

Obtain an employer identification number from your state. Verify compliance with immigration laws. See Form I-9. Keep this form as a part of your records for at least three years following the date of hire. 

Have each child file Form W-4 to determine withholding. See Form W-4. Keep this form on file for each employee. If you are going to pay your child an annual amount under $5,800, and your child has no other unearned income, you need only to indicate the child is exempt from withholding on line 7

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 Keep time cards on file with hours worked as determined by the signed Employment Agreement. Your children under 18 are exempt from FICA and Medicare tax. If the child is exempt from withholding, you will not have to deduct anything from the paycheck.. You can use the payroll sheet as a time/summary sheet to enter the checks you have made out. Remember to pay them at regular timely intervals. It would also be wise to keep a daily listing of hours worked and duties performed. 

File a Quarterly Federal withholding return. Form 941 will be mailed to you every quarter after you get your identification number unless you are invited to file annually on Form 944. Make sure you file the 941 even if you did not pay wages or withhold any taxes. If you are a quarterly filer, they will be expecting it.

 File a State quarterly withholding return if required by your state. You should receive information when you file for your State identification number.

File W-2’s for each child, and file Form W-3. File an annual federal unemployment (FUTA) return. This must be filed on Form 940 by January 31 each year. our child under age 21 is not subject to this tax, but file the Form claiming an exemption on line 2.

* File a State reconciliation of tax withheld if required. You should be contacted if your state requires an annual reconciliation.