Running a small business can be tough. Especially if you’re a small town business or located in a rural area, finding reliable employees for a reasonable wage can be a real challenge.
If your kids are old enough to work and want to contribute, is it a good idea to hire them as employees? Like everything, there are advantages and disadvantages to hiring your child to work for your business. You’ve also got some tax and employment rules and regulations to consider when hiring your child to work for your small business.
Is Hiring Your Child as an Employee a Good Idea?
A lot of people think it’s a good idea.
According to the Family Owned Business Institute (FOBI) in Grand Rapids, Michigan, there are 5.5 million family businesses in the United States, and family-owned firms achieve more than 6% higher returns on assets than non-family owned companies. Family Enterprise USA reports that family firms generate 64% of GDP and provide 78% of new job creation. You may have heard of a well-known family-owned company: WalMart. It is among the 35% of Fortune 500 companies that are family owned or controlled.
What Are Some Benefits of Employing Your Child?
There are a lot of financial and business management benefits to employing a child in the family business.
Family firms have higher employee retention rates than non-family-owned businesses. This may be a result of family members not being able to “quit” their families or their jobs, but family-owned businesses that face financial challenges also tend to weather them more successfully than non-family businesses, according to Family Enterprise USA.
You and your child may both have tax benefits when you hire them to work for your business. Other rewards for hiring your child include:
- Closer family bonds
- A committed workforce
- Business resilience
- Flexibility in facing business challenges
What do we mean by flexibility in meeting business challenges? According to Family Enterprise USA surveys, family-owned businesses are more likely to overcome business downturns because family members are able and willing to sacrifice more if problems arise. For example, during a cash flow crisis, family members are often willing to forego salary until the crisis is over. As a small business owner, you can’t ask a non-family member employee to continue to work without pay while the business is weathering a financial crisis or other small business challenges.
Your child can get benefits from working from your business that go beyond the wages they could earn. They include:
- Learning the value of work and earning money
- Solving problems and getting job experience working along with you
- Tax benefits on the wages they earn
What Are The Risks Of Hiring Your Child?
If you’re legitimately hiring your child as an employee, tax guidance is clear: you need to give them a job title, job duties, and keep track of their hours and earnings just like any other employee.
If you hire your child but they don’t actually do any work, then you have several risks. First, the tax benefits you can receive don’t count if your child is an employee on paper only. Second, we have all heard of cases where a hard-working business owner has hired a spoiled, entitled child who doesn’t fulfill their work responsibilities. If you employ others who aren’t part of your family, you could face charges of nepotism or unfairness if your child isn’t held to the same standards as other employees.
The job your child does for you and the salary you pay them might not match other job opportunities they may have as they grow older. You might also risk problems in your relationship with your child if they become an employee, especially if your child is a teen and you’re already coping with teen angst and challenges to your authority. And, if your child works only for you, they might miss opportunities for other job and life experiences.
Working for your business could also impact your child’s educational performance if their hours and duties aren’t well coordinated with school assignments and responsibilities.
What are the Tax Dos and Don’ts for Hiring Your Child?
There are a lot of tax benefits to hiring your child who is under age 18 to work for your business. In order to get these benefits, you need to account for your child’s work, wages, and employment records just as if they were a non-family member you hired to work for you.
First, your business has tax advantages because you can deduct the wages or salary that you pay your child on your business tax return. If your business is a sole proprietorship, a single-member LLC (you) that pays taxes like a sole proprietorship, or a husband and wife partnership/LLC, you do not have to pay payroll taxes or withholding for your child who is under age 18, including:
- Social Security Tax
- Medicare tax
- Federal Unemployment Tax (FUTA)
Once your child turns 18, you will need to start remitting Social Security and Medicare taxes, but the FUTA exemption extends up to age 21.
What is the exception to these rules? If you have an S-Corp or a C-Corp, you do need to withhold and remit payroll taxes including employee and employer contributions for Social Security, Medicare, and Federal Unemployment (FUTA) taxes.
Your child also has some tax benefits on the money they earn working for your business. The standard deduction is $12,400 per individual, so up to $12,400 of their earnings will be tax free. Even if they are under age 18, your child can also contribute some of the money they earn to a Roth IRA, further reducing their tax bill.
The tax benefits for hiring your children are significant, but you’ll need to comply with the Fair Labor Standards Act (FLSA) regulations for employees.
Can You Hire Your Child as an Independent Contractor?
If you’re wondering “Can I hire my child as an independent contractor,” you’ll need to comply with federal and state labor laws.
If your child works regularly for you, they probably don’t qualify as independent contractors. They will also have to pay self-employment tax on the money that you pay them as an independent contractor, which, as long as you’re a sole proprietor or husband-and-wife LLC, could be a higher tax amount than even Social Security or Medicare taxes.
Another tip: be sure to pay your child’s wages out of your business bank account. The tax benefits only count if the money is paid from your business and once it’s paid, it belongs to your child.
If You Hire Your Child as an Employee, Treat Them Like an Employee
None of the tax or business advantages to hiring your child to work for your small business add up if your child isn’t really working for you and doesn’t have job duties to fit their age and ability.
Don’t neglect to provide any training they need to work for your business, or licenses that could also be needed. You also need to include them in your business insurance policy. If you’re running a contracting business, for example, include them in your contractors insurance policy.
Small business challenges can seem overwhelming, and many times, our children and other family members may want to help out. Your children really can work for your small business and there can be tax and other financial benefits to you and them.