I normally don’t like to recommend sole proprietorships to my clients as working business solutions. I hate the additional liability that they create, and from a tax perspective they don’t make a lot of sense, either. You’re looking at paying a 15.3% self-employment tax on all your income, which can be cut in half just be switching to a corporation. But every so often a situation comes up where using a sole proprietorship can work to your advantage.
If you’ve got kids who are under 18 and who are working in your business, you can pay them without having to deduct either Social Security or Medicare contributions from their checks. That means you can pay your minor kids up to $5,350 per year before they have any federal tax obligation or deductions. Those wages are a tax deduction for your business, meaning you’ve saved about $900 in self-employment tax plus the income tax you aren’t paying on that amount.
As always I want to qualify the above by adding that generally speaking the tax savings here aren’t enough to offset the additional liability risk you take on or to wipe out the tax savings you can see by incorporating into a formal business structure. But if your business is in its early stages and your kids are helping out, it is a way to save some money.