Everything You Need to Know About Hiring Your Children
Do you want to hire your children to work for the family business? In the following guide, we share everything you need to know about hiring your children as employees. Keep reading to learn more.
Why Hire Your Children?
Hiring your children as employees for the family business can be advantageous for all involved:
✅ Helps instill important values from an early age, including work ethic, integrity, discipline, perseverance, and mastery of a variety of practical skills
✅ Provides needed assistance with many tasks related to your business
✅ Teaches them financial literacy and money skills
✅ Offers significant tax benefits for them and for your business
Let’s take a closer look at this last point, the tax benefits available when you decide to hire your children to work for the family business.
Tax Benefits of Hiring Your Children
First, hiring your children as employees may provide tax advantages to them and to you, depending on how your business is set up. If your business is a single-member LLC taxed as a sole proprietorship or a partnership in which you and your spouse are the partners and you hire your children under age 18 as employees, the wages you pay them are not subject to Social Security and Medicare taxes. (If you hire your children over the age of 18, then their wages would be subject to Social Security and Medicare taxes.)
In addition, when you hire your children under the age of 21 as employees, their wages are not subject to Federal Unemployment Act (FUTA) taxes, whereas over the age of 21, the wages are subject to FUTA taxes.
The rules are different for businesses taxed as a corporation, a partnership in which at least one of the partners is not a parent of your child, or an estate; in these cases, you would be required to pay Social Security, Medicare, and FUTA taxes on their wages just like any other employee.
Second, you can pay each of your children as employees up to $12,000 per year tax-free, as this figure is the standard deduction amount for individuals. Here’s how it works: your children will file their own tax return, but they won’t be required to pay any federal taxes on their income because the standard deduction would bring their taxable income down to zero. That’s not all—your business can take your children’s wages as a deduction, thereby lowering your taxable income. This tax strategy really is a win for your kids and for your business!
As you can imagine, the IRS expects many family business owners to take advantage of this tactic. That’s why in order to do it right, you’ll need to follow some basic guidelines when it comes to hiring your children as employees of your family business. Let’s explore some best practices for hiring your children next.
Best Practices for Hiring Your Children
- Keep Records and Documentation – Be sure to have your EIN, Employer Identification Number, when you set out to hire your children to work for the family business. You will need it to complete a W-2 Form, W-4 Form, and Form I-9 on behalf of your child and your business. In addition, you will need to keep payroll records, including hours worked, wages earned, and taxes withheld from the child’s income, as you would with any other employee.
- Deposit Your Child’s Wages – Make a practice of depositing your child’s wages into an actual bank account to keep an adequate payment record. You may want to consider depositing your child’s payments into a 529 Plan or a Roth IRA to help him or her save money for college and retirement. These are legitimate and financially smart ways to account for children’s earnings.
- Hire Your Child for Real Work – It may sound obvious, but you should be sure to hire your child to do actual work that you would pay another non-family member to do for your business. Whether you hire your infant or toddler to model for your business website’s photos, your middle-schooler to update your social media accounts, or your high school student for graphic design work, be sure the work they do reflects an actual job description for your business. Mowing the lawn at home and babysitting do not count.
- Pay Your Child Reasonable Compensation – Just as you should hire your child to perform legitimate work, so too should you pay him or her a wage that reflects the market value of the work being performed. If you wouldn’t pay a cleaning service $500 to vacuum your office carpets, then you shouldn’t be paying that kind of rate to your son or daughter, as it is an instant tip-off to the IRS. Be sure to compensate your child a reasonable wage, as you would any other non-relative employee.
- Follow Employment Laws and Child Labor Laws – Again, it goes without saying that you must follow all the employment laws that pertain to employees you hire outside the family. In addition, be sure to follow the many child labor laws that protect kids by detailing what kind of work they can do, when they can work, and how much they should be paid. Use your wisdom as a parent and a business owner to decide what is the most suitable situation for your child.
We hope this guide helps you make the best choice for your family as you consider hiring your children to work for your family business. Whether you want to cultivate discipline and integrity, help your children save for college or retirement, or give them a tax break while getting one for your business, we encourage you to follow the principles outlined here for the best outcomes.
Honest Buck offers financial expertise and professional accounting services to businesses in the childcare industry. Speak with one of our experts to learn how we can help you build a profitable Early Childhood Education business. Contact us today!
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