5 Reasons Entrepreneurs Should Hire Their Children Tax breaks help you afford to be the family hero.
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As a small business owner, hiring your children can be a win-win for everyone in the family. Here are the five top reasons why entrepreneurs should hire their children.
1. Tax deduction for your company.
The most obvious reason to hire your children is to have their salary as a tax deduction. The reason businesses get so many tax breaks is because the government understands the economic value of creating jobs. And by creating a job, your company gets rewarded with tax breaks.
Related: 8 Entrepreneurial Skills Your Kids Need to Succeed in Life and Work (Infographic)
2. Tax bracket benefit for you.
Another great reason to hire your children is the potential tax bracket benefit. Every dollar you deduct comes off of your highest tax bracket. Since most entrepreneurs use a flow-through entity, such as a partnership or S corporation for their business, every dollar of deduction actually reduces your personal income tax. So if you are in a 33 percent bracket, the salary you pay your child reduces your tax by $33 for every $100 you pay them. And since they are likely in a lower bracket than you, this creates a permanent tax savings for you.
3. Free income.
According to IRS Publication 501, a dependent only needs to file a tax return if they make over $6,300 in earned income and/or over $1,050 in unearned income (page 4, Table 2. 2016 Filing Requirements for Dependents). What this rule means is that up to $6,300 in income is free money for the child and your business if you pay them up to this amount. Children under 18 are also exempt from Social Security and Medicare (FICA) taxes, which is more free money. Alternatively, if your child needs to pay taxes, they can save all or part of their income to help pay for college expenses in a Roth IRA or Section 529 college savings plan.
Related: What It's Like to Start and Run a Family Business
4. Increase skills for your children.
Your family will also thank you for increasing your children's job skills by hiring them. Consider hiring your son or daughter to do social media marketing, web design, accounts receivable, administrative work or even sales, which are all great job skills to include on a resume. You also want to write a job description, and make the job real with accountability.
5. Your children can start getting a real financial education.
One of the biggest benefits of paying your children is that they can get a real financial education. You can teach them to use the extra income to cover some of their own personal expenses and/or invest in assets. This experience can educate them on the difference between acquiring assets that pay you versus liabilities that you owe. The earlier you can teach your children about managing money, the sooner you see relief in your monthly expenses.
Related: 5 Reasons Why Kids Make Amazing Entrepreneurs
After you hire your children, consider hiring your elderly parents for many of the same reasons. The rules are different for this age group -- 65 and older have different tax rules -- but it's the same concept of increasing your business deductions, reducing your tax bracket and providing them with money for their expenses. And of course, you'll be the family hero again.
Important note: Tax laws are subject to change. Always consult your tax advisor for the most up-to-date tax information.