Nicholas Godwin
April 11, 2022
Growing up happens in a soup of questions, memories, and firsts—weighty and lasting, light and short-lived.
For the last point, most kids don’t join the family business because most families don’t own one.
However, 93% of entrepreneurs agree that starting young influenced their business success. Also, a Southern Methodist University psychologist says parental guidance defines a child’s long-term choices.
Want your children to fancy joining your family business? Bring them in now.
Apart from boosting your child’s entrepreneurial strengths, hiring them can help you reduce your tax burden by $12,000 a year.
This article isn’t legal advice. But you’ll gain valuable education.
No, it’s not just the company you hand them that matters. The company they keep—friends and people you introduce them to matter.
MDS fosters an environment for families to build life-long, mutually beneficial bonds with top-performing entrepreneurs.
Your children can meet successful but down-to-earth business people who will reinforce the lessons you teach them. Plus, your children will connect with other entrepreneurial kids who’d inspire them.
MDS gives you the opportunity to share with your children the best of both worlds—your company and a company of successful people.
The known benefit of hiring your children is to carry on the family legacy.
True.
But employing your kids has ancillary advantages.
Let’s look at why you should put your children on payroll.
It’s never too early to teach your children entrepreneurial skills. According to Lemonade Day, children develop business awareness in middle school.
Another study by Sparks & Honey proves 72% of high school kids would love to own their own business someday.
What does this tell you?
Gen Z kids love entrepreneurship.
So, you might as well help them develop the work ethic for it.
Teach them business skills like decision making, team collaboration, management skills, accounting, and other business fundamentals.
Once your kids have acquired some basic business skills—they could learn some skills on the job too—hire them.
And then place them on your payroll.
The earlier, the better. Capitalize on your kid’s desire to try out new things. Such early business exposure is a solid springboard to success.
In the 2008 global financial meltdown, we had more employable labor than jobs to fill the roles. But the pandemic reversed that order.
From 2020 to 2022, we’ve had more job openings than people to fill them. Almost 50% of small businesses in the US reported unfilled job positions in one report.
Fitch’s rating reveals a 2.9 million labor force deficit compared to what it could have been without COVID-19.
Instead of waiting on improved labor force participation, your kids can fill those open positions.
Employee shortage is not good for business. Yet, even if we have a healthy talent supply, wage increases have gone off the charts.
Having your kids as employees could help you survive a shoestring budget. However, you don’t want to pay your kids unreasonable rates. The IRS will notice.
Paying your under 18 kids exempts you from withholding payroll taxes. That means you can escape withholding the Federal Insurance Corporation (FICA), State Unemployment Tax Act, and Federal Unemployment Tax Act (FUTA) for your employees, provided they are your kids.
What does this mean for business?
It equates to having their income as 100% deductible as a business expense. The best part is there’s no federal income tax on up to $12,000 earnings.
So, it’s fair to claim you can circulate $12,000 income within your household by employing your kid. More on this later.
Family businesses like Walmart, Berkshire, Ford, and Volkswagen are quintessential businesses for entrepreneurs.
You’d also love to have your family business survive through generations.
That’s why you should introduce your kids early.
A Cornell University research reveals that only 3% of family businesses survive the third generation.
However, delegating family business decisions to your children fortifies their connection with it—more like launching your succession plans early.
As a result, your child will have ample knowledge and skills to take over your business when the time comes.
Moreover, gleaning lessons from Hoshi Ryokan, one of the oldest family businesses in the world, family values facilitate sustainability. So, beyond technical business skills, your family’s core value is essential.
Those values form a bond between employees within the business. So, imparting your children with such values early on allows them to take root.
You’d also be training them in other business-centric values like:
Besides, a blend of culture cultivation and business mentoring helps you eliminate the chances of handing over the company to an unwilling child.
Businesses encounter occasional turbulence like economic downturns. However, family businesses are more likely to survive economic challenges than same-sized entities with alternative ownerships.
It’s not surprising.
Traditional employees, like children, have an ownership mentality. Your children would expend all their abilities to ensure your company tackles any challenge. As a result, they have stronger bonds than regular employees.
Successful family businesses forge and capitalize on trust within the family and beyond.
Hence, your children tend to have more loyalty toward your business. Capitalizing on this diligence and dedication benefits your business.
This trend explains why family-owned businesses retain talents for longer. Your progenies are less likely to quit their families or positions.
You tend to work better in a homely and warm environment. Having family members around offers a level of comfort that breeds productivity. You can add workplace output as a bonus advantage to employing our kids.
It probably seems like the best idea at the moment. So now, let’s examine the labor laws regulating children’s employment.
Family-run businesses enjoy some exceptions to general laws under the Fair Labor Standard Act of 1938. Putting your children on payroll to save money is a legal process.
You have to adhere to all the laws about this subject, including the labor laws. Although each state law often mirrors the federal labor law, you want to play safe by looking in your state’s regulations for clarity.
In case of any discrepancy between the two laws, the higher standard is final, or talk to a qualified lawyer or consultant.
What are the FLSA exemptions for family-run businesses?
The FLSA is strict about minors’ occupations. If your child is under 18, you need to consult your state labor department to confirm the specifics.
But under FLSA, children can’t perform hazardous tasks or be subjected to dangerous work conditions.
So, you can’t expose minors to jobs like mining, excavation, or explosive manufacturing.
However, some companies whose primary jobs involve worksites enjoy an exemption. This freedom results from them allowing children to work on specific tasks.
But state and federal governments have stringent conditions and monitor compliance in those cases.
Companies that run agricultural-related companies also enjoy an exemption. That being the case, FLSA rules on occupation and restricted hours don’t apply to children working in such companies.
Children under 16 who work in parent-owned businesses can work for any length of hours and at any time of the day, subject to the first exemption about working hazardous jobs.
The FLSA exempts the owner’s kids from any rule restricting the number of hours worked.
However, the state laws may have provisions restricting hours worked. Most state laws limit working hours due to strict constraints about school attendance. At the same time, some emphasize high school graduation.
You should check with your state laws. Don’t make your kids work during school hours, regardless.
The strategy to save $12,000 in a year is simple. We’ll explore it in three steps:
If their income stays within the standard deduction of $12,550, they wouldn’t even need to file a tax return. The tax implication of hiring minors (under 18) and adult children differ.
Here’s how these instances differ:
The rules about withholding income taxes do not apply to your minor children.
However, this variation includes workers’ compensation and federal and state unemployment insurance.
Why?
There is an assumption that your child wouldn’t sue you if they incur any injuries while working. Additionally, chances are your health insurance plan covers your kids. So, the medical bill is your responsibility anyway—pretty accurate assumptions.
The rule of thumb is that everyone, children inclusive, doesn’t pay taxes on their first $12,550 income. Note that this figure applies to 2021 and inflation influences it annually.
Children are not liable to tax payment on income below or up to the standard deduction. Not on their first income, not on the second, or anytime until they become adults.
But it gets better.
You can acquire a child’s tax credits by claiming your children as tax dependents. A dependent in this context should be under the age of 19 or 24 in the case of a full-time student.
When you place your kid on payroll, they must perform actual tasks. Depending on your business, kids may fill data entry, transcriber, and social media manager roles—the list is endless.
Please keep a record of their duties for reference.
Creating a job description for your kid’s job wouldn’t hurt—a distinct job title that piques their interest.
Warning: Don’t pay your kids out of an S or C corporation, or you’ll fall face flat in a pool of withholding taxes. According to page 13 of IRS Pub No. 15 (2022), the FICA benefit doesn’t cover S-corps.
Alternatively, pay your children out of a sole-proprietorship (family-owned management). You may pay your ward as outside labor. All you do is pay a sole-prop a legitimate management fee through your S-corp.
Wherever FUTA, FICA, or SUTA isn’t withheld, the IRS barely cares about a W-2, but consider a W-2 if you have a Roth IRA plan fixed. W-2 also eliminates self-employment tax issues.
Adult children also enjoy waived taxes provided they make less than the standard $12,550.
It’s a brilliant strategy.
But it’d help if you treat your adult children either as employees or subcontractors. It translates to issuing a W-2 and following its procedures or a 1099-NEC.
Unlike minors, your adult children should file tax returns regardless of how much they earn because they may be liable to self-employment tax if issued a 1099 form.
Not to worry, filing a tax return does have its advantages. It helps your child initiate their personal credit history.
Consider this as setting them up for adulthood. For instance, your children above 18 can pay their tuition for college.
It’s simple. Here’s how:
Assign your child a subcontractor role in your family business and pay them using the 1099 form. Voila! Your children can pay their tuition fees.
If your children earn more than $12,550, they will fall within a low tax level. They could establish a support company as a subsidiary of yours.
That’s a win-win. If that isn’t a display of entrepreneurship, what is?
Now that you are considering bringing your kids on board, remember that hiring your kid isn’t an avenue to play a fast one on the law.
The golden rule is to employ your child legitimately.
Let’s analyze the steps.
I can’t overemphasize the need to hire your child legitimately. Please give them a role in your company.
The task or role must be instrumental to your business success.
Minors have to study and attend school. So, your child doesn’t have to be the indispensable employee in the middle of your business affairs, but their tasks should help your business.
For instance, you may employ your tech-savvy kid to improve your website engagement or design.
If your child’s tasks seem like a flimsy excuse to avoid tax, the IRS will catch on to it.
You can’t pay your child who does nothing to aid your business. For clarity, create an employment contract listing your child’s role in the company.
It’s valid evidence against you if your ward’s employment status raises questions. Moreover, if your child’s contribution isn’t beneficial to your company, you won’t qualify for deductions.
Employment becomes valid after the issuance of all required forms. Your child is not exempt. You are obligated to treat them as employees.
An employer identification number (EIN) is essential for all employees. It indicates your company on tax documents.
Apply for an EIN after hiring your child.
Your children should also fill out Form W-4 depending on their age.
Fill the form 1-9 together with your child. This form verifies the work eligibility and identity of employees.
Although everyone knows you’re hiring your children, doing the documentation according to the law helps everyone benefit from the arrangement.
Imagine a 9-year-old operating a forklift. The image reeks of extremity. Not to mention no parent would condone it.
The child labor law proscribes hazardous tasks. It also prohibits excessive work hours and task responsibilities for those under 18 during a school year.
Make all tasks age-appropriate.
Each state also dictates child-appropriate tasks. So, check the Department of Labor (DOL) documents for your State.
College tuition, feeding, clothing, or other education payments don’t count as wages.
When you hire an employee, pay them. It doesn’t matter if the worker is your son or daughter.
These basics qualify as parental support. You may claim the child credit tax if your parental support burden overwhelms you.
The IRS believes you are responsible for your children’s feeding and education regardless of employment status.
You can’t pay your child’s college tuition, hoping to get a business deduction. However, pay your child, and they can use the wage to pay for college tuition on their volition.
You can always deduct your ward’s wages, but they must get their pay, and they must earn those wages by working.
Pay with direct posting or check instead of paying in cash. Cash transactions are untraceable; however, direct posting and check deposits leave a paper trail. It offers evidence of wages paid.
Your proteges can’t earn ridiculously high salaries. Newbie social media managers make $25-$30 per hour. It would be preposterous to pay your child $100 instead.
And don’t underpay.
A youth or child’s minimum wage is $4.25 per hour. This youth minimum wage should only last for 90 days. After that, your child would be entitled to a $7.25 minimum wage.
Consult with a local job agency to make an informed wage decision.
You know what they say; there’s an equal and opposite reaction for every action.
But permit me to tweak that a little: For each of your children you hire, you can save up to $12,000.
So, trigger the entrepreneurial spirit in your kids. Then, put them on your payroll.
Besides the tax deductions, your kids will feel confident and ready to tackle real-life business challenges.
Now, it’s your call. What will it be?
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