Hi everyone! I’m Bette Hochberger, CPA, CGMA, and I wanted to come on here today to discuss a smart tax strategy. As a rental property owner, you’re probably always looking for ways to maximize tax savings and reduce expenses. One often overlooked strategy is hiring your children to work on your rental properties. 

Not only does this help teach them responsibility and work ethic, but it can also provide significant tax benefits. However, to take advantage of these perks, it’s important to follow certain guidelines to keep everything compliant with IRS regulations.

Here’s how hiring your children to help with your rental properties can be a win-win for both you and your family:

Tax Savings from Shifting Income

One major advantage of hiring your children is shifting some of your income to them. When you pay your children for legitimate work related to your rental properties, that income is taxed at their rate, which is typically lower than yours. For 2024, your child can earn up to $13,850 without paying federal income taxes due to the standard deduction. This helps reduce the overall tax burden for your family.

What Kind of Work Can They Do?

The work your children perform must be legitimate and related to maintaining your rental properties. Depending on their age and skills, tasks could include:

  • Landscaping: Mowing lawns, trimming bushes, and maintaining outdoor areas.
  • Cleaning: Preparing properties for new tenants, cleaning units after tenants leave, or general upkeep.
  • Maintenance: Painting, fixing minor repairs, or assisting with DIY projects.
  • Administrative tasks: Filing, organizing receipts, or managing online listings for your rentals.

You should pay your children reasonable wages for the work they do. The IRS will scrutinize wages that appear too high for the tasks performed, so be sure to pay a fair market rate for their labor.

Payroll Considerations

If your children are under 18, you may be able to avoid certain payroll taxes, including Social Security and Medicare. However, this only applies if you hire them directly through your rental business as a sole proprietorship or a partnership where both partners are the parents. If your rental properties are owned by an S-Corp, C-Corp, or LLC, you’ll need to pay payroll taxes just like any other employee.

Keep Records to Stay Compliant

As with any business expense, you’ll need to keep detailed records to justify paying your children for their work. Maintain timesheets, job descriptions, and payroll records to show that the payments are for legitimate services. Additionally, issue a W-2 to your child at the end of the year, just as you would with any other employee.

Educational Opportunities for Your Kids

Beyond the tax benefits, hiring your children gives you an opportunity to teach them about the real estate business. They can learn valuable skills like property management, budgeting, and even basic maintenance work. These experiences can instill financial responsibility and give them a head start on understanding entrepreneurship.

Potential Pitfalls

While hiring your children offers many advantages, there are a few things to be mindful of:

  • No ‘Sham Jobs’: The IRS won’t allow you to claim tax savings for jobs that aren’t legitimate. Make sure your children are performing actual work that contributes to the business.
  • Reasonable Wages: Pay your children fairly based on the tasks they perform. Overpaying can lead to audits and penalties.
  • Age Restrictions: Some tasks, like heavy lifting or operating specific equipment, may not be appropriate for younger children. Be sure to follow state labor laws!

Hiring your children to work on your rental properties can provide amazing tax benefits if you do it correctly. Not only can you shift income to a lower tax bracket, but you can also avoid certain payroll taxes, all while teaching your kids valuable life skills. Just be sure to follow IRS guidelines and maintain proper documentation.

I hope you all learned something new today. As always, stay safe, and I’ll see you next time!