The Surprising Benefits of Hiring Your Kids
Free Book Preview Entrepreneur Kids: Launch Your Own Business
As a father of five children, I know all too well how expensive kids can be. It’s always, “Dad, can you loan me $20 for the movies?” or “I saw the cutest pair of jeans and they are only $350.”
How is a small-business owner supposed to keep the company lights on and keep the kids happy? Well, here’s one great way: hire your kids.
Your company can hire your kids, pay them $6,100 per year, and in most cases the business takes the write off and neither the kids nor your household is taxed on the wages.
Putting your kids to work provides some amazing benefits. Not only does it allow them to learn the value of work, but it also gives them insight into the family business and provides you with a pretty nice tax deduction. (It’s always a good idea to check with your accounting professional prior to taking business deductions.)
You can pay your children who are under the age of 18 up to $6,100 tax-free by taking the standard deduction. That is $6,100 your child will have to spend on a car, college, clothes, the movies and gas -- all the things that they normally are asking you to pay for out of your after-tax wages. Now they can use the money they earn and you can save on your taxes. It’s a win-win.
In addition, your kids could put up to $5,500 a year away tax free into a Roth IRA. The chances of Social Security being around when our younger children get ready to retire are slim to none, so why not start saving now and reap the rewards for a lifetime?
That is a total of $11,600 your child can earn tax free, and you get to write off the cost as a legitimate business expense thereby reducing your gross income.
As with anything, you are required to meet a few guidelines for your child’s work to pass scrutiny from the IRS:
- The job must be reasonable for their age. For example, if you hire your 15 year old to file paperwork, take out the trash and answer phones, you are probably OK. If you hire your 7 year old to drive heavy equipment -- that won’t fly.
- You also need to document the job as if you were hiring anybody else. Make sure you have a job description and employment agreement.
- Make sure the salary the corporation is paying the children is reasonable for the job they are doing. If you already have an employee doing similar work, then use that as a guideline for what they should get paid. If you are creating a new position, then do a comparative study based on the type of work and the business you are in.
- Make sure you keep a timesheet showing the hours/days worked. This will help substantiate the amount of money received for work.
- You must own your own business, or be a single/married couple that owns an LLC. Hiring your kids through a corporation will require you to pay payroll tax, but you can still write off their wages.
- You can still take the Child Tax Credit up to $1,000 if you qualify.
Remember, these deductions apply only to your children under the age of 18 who are your dependents. College kids, nieces/nephews, neighbors' kids or dependent parents don't meet the requirements.
The ability to hire your kids and reward them for a job well done is another benefit only available to business owners. Summer will be upon us before you know it. This is a perfect time to get your kids on the payroll and begin to instill in them the concept of an honest day’s work for an honest day’s pay. Is there any finer benefit that comes from business ownership?