If you own your own business, consider the advantages of hiring your own child.  This can be a great way to reduce the overall family tax bill by shifting income to children.  If your child is doing a valid job and the pay is reasonable for the work performed, the business can claim a normal tax deduction for wages paid.  This reduces your own self-employment income and tax.

The child will report the income, but usually at a lower tax rate than the parents.  This will be considered earned income, so is not subject to the Kiddie Tax rules which taxes children’s un-earned income at the parent’s rate.

If your business is a sole proprietorship or a partnership where each partner is the child’s parent, the wages will not be subject to Social Security or Medicare tax if the child is under age 18, and not subject to FUTA tax if the child is under age 21.

Now that your child has earned income, he or she could make contributions to an IRA.  The contribution is limited to the amount of earned income, but cannot exceed $5,500 for 2013.  Imagine how much this IRA will grow during your child’s working years.

Consider that if your child earned $11,600 in 2013, made the maximum IRA contribution of $5,500, and had no other income (such as investment income), they would pay no tax.  ($11,600 – $5,500 IRA contribution – $6,100 standard deduction = zero taxable income).

Aside from the potential tax savings, your child will gain valuable real-life experience in the workplace.  You will want to make sure this is a real job, no matter how basic or simple. It could be office filing, packing orders, or simple production activities.

Keep records of hours worked just as you would for any employee. If possible, pay your child using the normal payroll system and procedures.  You will be required to do payroll reporting for your child as you would with any other employee.  This means filing payroll tax returns and issuing annual W-2 forms at the end of the year.