How to Employ Your Children (and Why)
My oldest son always asks how he can earn money, so this year, I employed him to help pack and ship holiday gifts to all of my clients. He actually made my life easier during this busy time of year, but the best part was seeing his pride and satisfaction. The smile on his face when he received his first paycheck was the cherry on top. And when he asked me what he should do with it, like any financial planner worth his salt, I replied, “Let's open you a Roth IRA!”
If you're a business owner or self-employed, employing your children could be a powerful financial strategy that benefits your family and your business. Not only does it offer tax advantages, but it also provides your children with valuable life skills and an early understanding of money. Here's how to do it and the benefits you can reap.
Tax Benefits of Employing Your Children
Tax Deductibility for Your Business: If you run a business, paying your children for legitimate work is tax-deductible as a business expense. Whether they help with administrative tasks, social media, or other business-related duties, wages paid to your children reduce your business’s taxable income. This lowers the taxes you owe at the end of the year.
Tax-free income for your child up to the standard deduction: Your child will not pay income taxes on their wages up to their standard deduction ($14,600 in 2024).
FICA Tax Exemption: If children under 18 work for a family-owned business, you don't have to pay Social Security and Medicare taxes (FICA). This can be a significant saving for both you and your child. However, this does not apply if you employ them in a non-family business.
Roth IRA Contributions: The best part? Your children can contribute to a Roth IRA based on the income they earn from your business. They can contribute up to the lower of their earned income or $7,000 (limit as of 2024) to a Roth IRA. Since Roth IRA contributions grow tax-free, this is a great way to start building savings early.
Benefits to Your Children
Financial Literacy: Earning their own money teaches your children the value of hard work, budgeting, and saving. They begin to understand where money comes from and how to manage it—skills that will benefit them throughout their lives.
A Sense of Responsibility: By contributing to the household or business, children gain a sense of pride and accomplishment. This fosters a work ethic and the feeling that they are valued members of the family team.
Experience with Money: Early exposure to earnings, taxes, and saving for the future sets the stage for sound financial habits later in life. This experience with money management is something that can pay dividends far beyond their childhood.
Key considerations when employing your children:
Compensation must be reasonable, and wages must reflect actual work done. You must ensure that the wages paid to your children are reasonable and aligned with the market rate for similar work. Paying children an unreasonably high salary can attract IRS scrutiny, as it could be viewed as a way to shift income to a lower tax bracket or avoid taxes. On the other hand, paying them too little may not meet the legal requirements for fair compensation.
Compliance with child labor laws: children of any age can generally be employed in a parent-owned business, but be sure to comply with child labor laws that prevent children from working in certain occupations or hazardous conditions.
Documentation is key: Document your child’s work hours and include dates and detailed descriptions of tasks performed. From a tax standpoint, treat them as you would any employee, such as having them complete a W-4 and issuing a form W-2 to document your child's pay. Also, .
If your child is over 18 and you treat them as an independent contractor, have a signed contract outlining their work responsibilities and issue a 1099-NEC as required.
Changing family dynamics: While there can be many benefits, mixing family and business can complicate relationships. You may find it challenging to separate your role as a parent from your role as an employer. Be sure to establish clear boundaries and expectations, but also listen to your child. They may feel increased pressure or lack genuine interest, both of which can breed resentment over time.
Age-Appropriate Jobs for Kids
While your children may not be ready to tackle complex business tasks, there are many age-appropriate ways they can help out:
Young Children (Ages 6-12): Basic office tasks such as sorting mail, organizing files, or helping with inventory can be great for younger kids. These jobs teach responsibility and offer an introduction to working in a business environment.
Teens (Ages 13-17): Older children can take on more significant roles like handling social media accounts, assisting with customer service, or taking on special projects.
Incorporating your children into your business or household workforce isn’t just a smart financial strategy—it’s a valuable opportunity for them to develop life skills and gain an early understanding of financial responsibility. Plus, tax benefits like deductions and Roth IRA contributions make it a win-win for the entire family.
