Employing Your Child In The Family Business

As a family business owner, you are in a unique position to give your child a head start in this world. You can teach your child real life lessons in a professional setting. These lessons are learned much quicker, as the child is away from the house and has to learn to work with others.

When I was growing up, my dad started this by bringing me to work at his sign manufacturing business on Saturday mornings. I would sweep the floors, clean pick-up trucks, and wipe down the microwave. I can still recall the smell of those overused microwaves.

Over time, I took on more meaningful jobs. As a finance major in college, I was working in the office completing work orders, invoices, and balancing the general ledger. Being able to see my dad’s work ethic in person has been invaluable to my career.

In addition to teaching your child great life lessons, there are financial benefits to employing your child. Here are a few of the best:

  • Standard Deduction. Like any other worker, your child is entitled to deduct at least $12,000 of income each year. This means that the first $12,000 they earn is tax-free income.

  • Business Deduction. As with other business expenses, wages paid to your child are a deductible expense to the business. The wages paid must be reasonable with respect to the job performed.

  • Retirement Savings. With earned income, your child can begin saving for their retirement. If they earn $12,000 or less, they have a 0% tax rate. By contributing to a Roth IRA, those dollars then grow tax-free.

  • College Savings. If your child earns above the annual contribution limits to a Roth IRA ($6,000 starting in 2019), they can gift some money back to you. With that money, you can contribute to their 529 college savings plan. 529 plan money grows tax-deferred and is taken out tax-free for qualified education expenses.

  • Family Help Exclusion. If your business is a sole proprietorship or a partnership where both partners are the parents of the child, wages are not subject to Medicare or Social Security taxes. However, if the business is incorporated, their wages are taxed like any other employee.

  • Investment Experience. It takes time for anyone to learn the basics of investing. By employing your child and having them contribute their earnings to various investment accounts, they are getting started at a young age. This is a great opportunity to discuss the power of compounding interest, how to build a diversified portfolio, and how to systematize their investment process.

Interested in hiring your child in your business? Remember to follow these rules to do it the right way:

  • Document their services and compare their wages to that of your industry’s standards.

  • Pay them via paychecks - just like your regular employees. The petty cash fund is off limits for paying your child.

  • Keep a timesheet of the days and hours your child works.

  • Give them work that is suitable to their abilities. They can take on higher level roles as they gain experience at work and learn more at school.