By now, your tax return for last year has probably been filed, and it’s time to focus on cutting taxes for the rest of this year. So here’s an idea for those running a small business as a sole proprietorship or husband-wife partnership. Consider hiring your under-age-18 child as a bona fide employee. It can be part-time or full-time — whatever works for you and the kiddo.

The Tax-Saving Benefits

Your under-age-18 employee-child’s wages are exempt from Social Security and Medicare taxes and federal unemployment tax (FUTA tax), which we will collectively call federal employment taxes.

Even better, your employee-child can use his or her standard deduction to shelter up to $6,100 of 2013 wages from federal income tax. So your kid will probably owe zero federal employment taxes and zero federal income tax on the first $6,100 of his or her 2013 wages. Cool!

Hire your kid, get a tax break

On your side of the deal, you get a business write-off (on Schedule C, E, or F depending on the nature of your business) for money you might have dished out to your child anyway. The deduction reduces your federal income tax bill, your self-employment tax bill (if applicable), and your state income tax bill (if applicable). Since the write-off also lowers your adjusted gross income (AGI), there’s less chance of getting bitten by the extra 0.9% Medicare tax on earned income, the 3.8% Medicare surtax on investment income, and various unfavorable phase-out rules (like the ones that can reduce or eliminate your most-valuable itemized deductions and your personal and dependent exemption deductions.)

Let’s add up the benefits of hiring your under-age-18 child.

No federal employment taxes on the kid’s wages.

No federal income tax on the first $6,100 of the kid’s 2013 wages.

Valuable business deductions for you.

Valuable work experience for the kid.

Money is kept in the family instead of going to outsiders.

Your child can set aside some or all of the wages and invest the money. Hopefully, that cash stash can eventually be used to help pay for college, which means you won’t have to shell out as much.

After your child reaches age 18, Social Security and Medicare taxes will be due on the wages. However no FUTA tax is due until age 21. Your child’s standard deduction will still shelter a good chunk of the wages from the federal income tax. And you’ll still collect a nice business write-off.

Federal Employment Tax Exemption Is Only Available in Limited Circumstances

The aforementioned federal employment tax exemption for an under-age-18 employee-child is only available when the parent’s business (the employer) is conducted as: (1) a sole proprietorship, (2) a single-member LLC (SMLLC) that’s treated as a sole proprietorship for tax purposes, (3) a husband-wife partnership, or (4) a husband-wife LLC that’s treated as a husband-wife partnership for tax purposes.

What kind of labor market does the Fed want?

If you use a corporation to conduct your business, the federal employment tax exemption is unavailable for wages paid to your child, but hiring the kid can still be a tax-smart deal. In this scenario, however, your child’s wages will be subject to Social Security, Medicare, and FUTA taxes regardless of his or her age—just like for any other employee. The good news: your child’s standard deduction ($6,100 for 2013) still creates an income tax shelter for the child, and your business can deduct the wages and the employer’s share of employment taxes.

Key Point: The kid’s wages must be reasonable for the work performed. So this idea works best with teenage kids who can be assigned meaningful duties. You should keep the same business records that you would for any other employee to substantiate hours worked and duties performed. Your business should issue your child a Form W-2 for each year’s wages, just like you would for any other employee.

IRS Confirms Federal Employment Tax Exemption Is Available for Wages Paid by Parent’s SMLLC to Under-Age-18 Employee-Child

Until fairly recently, there was uncertainty about whether the federal employment tax exemption for wages paid to an under-age-18 employee-child is available when the employer is the parent’s SMLLC that’s treated as a sole proprietorship for tax purposes. IRS regulations now say the exemption is indeed available. Source: Temporary Regulations 31.3121(b)(3)-1T(d), 31.3306(c)(5)-1T(d), and 301.7701-2T.

The Bottom Line

If your small business has meaningful work that could be performed by one or more of your children, the hire-the-kid strategy is virtually a no-brainer. With summer vacation rapidly approaching, you could implement this strategy as soon as school ends. Go for it!