If you are self-employed and a parent, you could qualify for a number of additional tax deductions and other benefits. Most of the benefits derive from deductions and tax credits on your income tax. Expenses that you can potentially subtract from your income to pay less in taxes include healthcare, childcare, and education.
Below, we look at the ways self-employed parents can decrease their annual tax liability.
Key Takeaways
- The child and dependent care tax credit allows you to deduct up to $1,050 in childcare expenses ($2,100 for two or more children) every year the child qualifies.
- Families can deduct most healthcare expenses over 7.5% of their adjusted gross income (AGI).
- Some deductions for education expenses can be filed retroactively for previous tax years.
- Self-employed parents can employ their children and pay them a small salary that is tax-free.
Child/Dependent Tax Benefits
With an estimated 15 million self-employed workers in the U.S., these deductions can impact millions of households. See which of them apply to you.
Child Tax Credit and Other Dependent Credit
You can claim a child tax credit of $2,000 for each child under the age of 17 and $500 for children 17 and older or other dependents. In order to claim the full credit, your modified adjusted gross income (MAGI) must be $200,000 or less if you file as a single person or $400,000 if you are married filing jointly.
The maximum refundable portion of the credit in the 2024 tax year is $1,700.
Childcare Benefits
Paying a daycare center, babysitter, or even summer camp fees for a child can be a lot cheaper with tax benefits. Taxpayers with a child under the age of 13 or a disabled dependent of any age are eligible for a non-refundable tax credit worth:
- Up to 35% of $3,000 in qualifying expenses (for a maximum benefit of $1,050) for one dependent, or
- Up to 35% of $6,000 in qualifying expenses (for a maximum benefit of $2,100) for two or more dependents.
This tax credit is intended for both employed and self-employed parents and guardians who earn income regularly. Individuals and couples who have been unemployed for a part of the year can also use it. To qualify, all the following conditions must be met:
- You must have earned income in the past tax year (both your spouse and you if you are filing together).
- You must be the child’s (or dependent’s) custodial parent or caretaker.
- You must either work and earn an income, or actively be looking for employment.
- Your child or dependent must be under age 13—unless they have a physical or mental disability that makes them unable to care for themselves.
- The provider(s) of childcare must not be your dependent or spouse, nor the child’s parent.
The IRS has a broad spectrum of expenses it considers childcare-related, which are not limited to daycare and babysitters. The full list of potentially eligible expenses includes the following:
- Babysitter or licensed childcare center
- Maid, housekeeper, or cook who cares for the child or dependent
- Summer camps, day camps, and even sports camps can qualify if they care for the child or dependent while the parents are working. Overnight camps are not included and do not qualify
- Before-school and after-school care for children under age 13
- Nurse or other care providers for disabled children or dependents.
Medical Expenses
Since Jan. 1, 2020, all qualified health expenses that exceed 7.5% of your AGI, including premiums, are tax-deductible. This applies to unreimbursed medical expenses and doesn’t cover cosmetic treatments.
Qualified health expenses that apply to children and their parents are as follows:
- Preventing, diagnosing, and treating mental or physical ailments
- Surgery and body modification strictly for health purposes (and not cosmetic)
- Transportation to a healthcare provider
- Health insurance premiums
- Prescribed medication
Qualified self-employed individuals can write off 100% of their health insurance premiums. Taxpayers can apply this deduction on the first page of Form 1040—this is available to self-employed individuals regardless of whether they itemize or not.
Education Expenses
Since education is not considered a necessary expense in most cases, there are fewer avenues to decrease your annual tax liability through your child’s school and college fees. However, there are still several cases that could apply.
College Tax Credits
Taxpayers with a MAGI of $90,000 or less (for singles; $180,000 or less for married couples filing jointly) are eligible for the American Opportunity tax credit. This credit can reduce your taxes by up to $2,500 per year for four years of college.
If this option isn’t available, you can try the Lifetime Learning Credit. It can lower your tax by 20% of the first $10,000 you spend on enrollment and tuition fees with a cap of $2,000.
Single taxpayers must have a MAGI of $90,000 or less to qualify ($180,000 for married couples). In order to claim the full credit, a taxpayer’s MAGI must be $80,000 or less ($160,000 for joint returns).
Coverdell Education Savings Account (ESA)
You can invest $2,000 per child each year into a Coverdell ESA. These contributions are not deductible, but all distributions you make through this savings account are tax-free to the beneficiary—as long as they are used to pay the costs of lower, middle, or higher education.
The contributions can be made for children under 18. If your child does not go to college when the time comes, you can transfer the funds to another child or relative. High-income individuals and families are not eligible for an ESA.
Student Loan Interest Deduction
Interest on loans for college tuition or vocational school is also deductible. The deduction limit for qualified students is $2,500, but higher-income families are phased out. The tax deduction gets reduced and eventually phased out, depending on your income.
Individuals with a MAGI of $75,000 or higher ($155,000 for married couples) will see a gradual reduction in the amount of interest that's deductible. You can't claim the deduction at all if your MAGI is $90,000 or more for single filers ($185,000 for married couples filing a joint return).
Child Support for Self-Employed Parents
Income received from child support is not taxable according to the IRS. Child support payments are typically calculated based on the net income of the paying individual. If that individual is self-employed, a number of issues can arise.
This is due to the subjectivity found in calculating net income for the self-employed. Generally speaking, self-employed income is calculated by deducting expenses required to operate the business from the total income generated by the business. Under such a scenario, the self-employed parent could potentially deflate income by claiming unnecessary business expenses, thereby reducing a child support obligation.
Income used to calculate child support payments for self-employed parents varies widely by state. Certain courts do not permit the consideration of tax exemptions or expenses that would have been incurred irrespective of the business, such as utility bills.
Due to the inherent subjectivity and potential for manipulation in claiming net income, the self-employed parent could be required to legally prove their income. The means to achieve this would vary depending on the applicable jurisdiction but is likely to require financial records, tax documents, and even bank statements to justify income.
If there are concerns that the self-employed parent is not accurately reporting income, it's possible to turn to a certified fraud examiner to uncover concealed assets or a forensic accountant to examine financial records for exclusions.
Hiring Your Child
Sole proprietors (or partners, if they're both the parent of that child) and self-employed individuals can hire their children if they are under 18 years of age. You can pay your child up to the standard deduction—$14,600 in 2024—and they will not owe income tax or most employment taxes. You can even deduct this wage as a business expense.
Do Parents Pay Taxes on a Child's Income?
Dependent child pay is considered earned income for that individual. The child is subject to their own income tax assessment at their own individual tax rate. Be mindful that state tax treatment may vary.
Does My Child Need to File a Tax Return?
If your child earned less than the standard deduction amount during the tax year, the child will not be subject to taxes and does not need to file. If they earned more than the standard deduction amount, they may have a tax liability or may be owed a refund. In addition, a child who earns in the 2024 tax year more than $1,300 in unearned income such as dividends or interest must file a tax return.
How Much Can I Make Being Self-Employed Before Filing Taxes?
The IRS requires if you have net earnings of $400 or more, you must file a federal income tax return. You may not owe much (or anything) in regards to income taxes, but the IRS sets this limit arbitrarily low to ensure self-employed individuals remit self-employment taxes subject to much lower income thresholds.
The Bottom Line
Self-employed parents have many avenues through which they can strategically approach their federal income taxes. If they have a child, the taxpayer is potentially eligible for many child or dependent tax credits. In addition, the taxpayer may receive favorable tax benefits when their child goes to higher education or incurs medical costs.
