The TCJA eliminated personal exemptions which makes your child worthless to you on your Form 1040. Sorry, but its true!
But what if I told you there is another way to turn your child into a tax deduction?
The current standard deduction for a single taxpayer is $12,000. This 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, which 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 S and C corporations and the non-spouse partnerships still have to pay the payroll taxes on all employees—period. There is no parental benefit.
Let's break it down: A sole proprietor can hire their child, pay them up to $12,000 with no payroll tax expenses, deduct the $12,000 on Schedule C, and the child does not have to pay income tax. Nobody pays income tax on this $12,000. Nobody pays payroll tax on this $12,000. What if you have 4 kids? That is a $48,000 deduction with no income tax to be paid.
If you are an S or C corporation, you would have to pay payroll tax, but still no income tax will be paid. This is still awesome!
Make sure that you have the necessary procedures in place for your family to realize the benefits.