When you pay your children reasonable wages to work in your family business, you provide them with valuable knowledge and get a few special tax breaks in the process.

In 2006, you can pay your child up to $5,150 without either of you incurring a tax liability. Wages you pay your minor child are fully deductible as a business expense, lowering your gross income. For your son or daughter, the standard deduction eliminates all the tax on the childís income. And since the money was earned, the ìkiddie taxî doesnít apply even if your child is under age 18.

If your business is unincorporated, hiring your children can reduce payroll taxes as well. Under current law, wages paid to a child under age 18 are not subject to FICA taxes. In addition, wages paid to a child under 21 are exempt from Federal Unemployment taxes.

The work your children perform must be necessary for the business, and wages must be reasonable for the type of work performed. Thereís no age limit for employing your child, but it may be difficult to justify wages paid to a five-year-old.

You should pay your child by check at the same intervals that you pay other employees. At the end of the year, issue a W-2 form to each of your children who worked in the business and send a copy to the IRS.

When employing your children, one factor you should keep in mind is that money held in your childís name may reduce the amount of financial aid available. Thatís because under the financial aid formula used to determine federal aid eligibility at every college and university, students are expected to contribute at least 35 percent of their assets, while parental contributions are capped at 5.6 percent.

Everyoneís financial situation is different. A CPA can help you identify the right course of action for your business and your family.