Benefits Of Hiring Your Kids; Taxes & Beyond
A part-time job is a great opportunity for kids to learn a new skill, learn about responsibility and also make a little extra money on the side. For years, family-owned businesses have benefited greatly by putting their children to work, not only to address labor concerns, but from a tax standpoint. Your business can employ your children who are under the age of 18 and their income is not subject to Social Security or Medicare taxes. Even better, your business still gets to take a deduction for the payment costs for the labor, so you not only pay less on the cost of labor, but it also lowers your taxes.
In order to qualify, you must have a sole proprietorship or a limited one where both parents of the child are the owners of the business. Because the children are also not paying any federal income tax if their income is under $13,850, they will save money as well as helping you to save. It’s important that you speak with an accountant to make sure that your business not only qualifies, but that your payroll and taxes are also properly set up for this kind of arrangement.
Are There Tax Benefits For Hiring Your Kids?
Simply put, yes, there are major tax benefits for your children if you employ them in your business. Those tax benefits impact both you and them. They will not pay the same tax rates as older workers or those who are not related to you. Additionally, you will benefit from having their employment be a deduction from your company profits, helping you to save. Hiring family as labor tax-free not only benefits you as a business in the present, but it also can have long-term benefits including management of the business.
When children are taught the family business, it gives them an inside understanding and appreciation of work, customer management, making sure things remain organized, being professional as well as money management. Many feel that their children receive a better education on getting prepared for the workforce in these types of jobs than they do from trade schools and institutions that offer job training. Learning at a young age, from family, can offer a variety of benefits for the child, not to mention the financial benefits you can create for them.
Benefits For The Kid
Children can work in this country but they have to actually do legitimate work for your business and get paid fairly before you can start deducting their labor costs. They need to be paid through payroll and have a reasonable salary comparable with what is paid for that work. Hours have to be managed as well and each state will have regulations you have to be aware of for that. While discussing this strategy with your accountant, they will also show you the options available that will financially benefit your child in the short and long-term.
The wages that you are paying your children can be utilized to benefit them financially for years. The money can be utilized in a variety of ways including a Coverdell Education Savings Account, a Roth IRA, a 401k and more. While it may not seem like much, every dollar will add up over time and with interest you are giving your children a tremendous financial head start while also teaching them the benefits of hard work and knowing a skill or having value at a thriving business.
How Much Can You Pay Your Kids & Be Tax Free?
If your child is between the ages of 7-22 you can legally employ them and take a deduction for what they are paid. You can pay your children a reasonable wage and as long as they are working allowable hours, they can make as much as they want. For the child, they can make $13,850 a year and have it not be taxable income based on the regulations as they stand now. But what if they make more?
This is where options like the IRA and 401k can benefit. If a child is making more than $14,000 a year, they will be able to put some of that money into certain retirement or savings programs that will allow them to take their annual income back below the mark and get back to their taxable income being zero. The child will file their own tax return in order to do this but it allows them to save big and utilize more of their money for their future.
Realistic Training
You know your company. Can your child step in today and take over an important role that you would pay them to do? You have to be realistic with their capabilities, their role and the hours that they work as well as what you are paying them to do that job. One of the best things to do is to train the child at the job or jobs they are going to have. Not only is this great practice for you for training other employees, but it gives you an opportunity to show them exactly how to handle things and do it the way you want them to handle the role.
The more effort you put into training, the more comfortable and confident the child will be with the job. Additionally, this is a great way for them to learn how they can move up in the company, taking each role step by step but knowing where they could eventually go when they are older and ready to possibly take over the business.
Managing Everyone’s Expectations
Every year your child works for you there will be tax breaks and benefits for both your business and them as well. You need to take some time to go over your options with your accountant and research what role the child can perform, what they can do to earn money, how much they should be paid and how to utilize that money in the best possible way for both you and them. Yes, you may not have planned to set up an IRA for your 15 year old, but if they are going to work for you, why not have them benefit from it in every way possible?