Many entrepreneurs have no desire to hire any employees. In some cases, it’s hard to blame them. For some small business owners, employees are a significant expense they can’t afford to invest in. And no matter how extensively you interview, you never know how a new employee will fit in your company until they are actually on the job.
But even with all those concerns, there is one group that most entrepreneurs should be hiring as employees; their kids. I know a lot of people who have no interest in hiring their kids to work in their business. They have enough trouble getting them to make their beds in the morning, how will they get them to do more important work for hours at a time?
I’m certainly not here to tell you how to parent your kids, but if you can figure out how to make it work, hiring your minor children (under 18 years old) offers several benefits to both your kids and your business, including the following:
1. Significant Tax Savings
Hiring your minor children to work in your business could offer significant tax savings to you. First of all, if your business operates as a sole-proprietor or LLC., you are not required to withhold or pay any payroll taxes. This alone could save you thousands of dollars over hiring a traditional employee.
Second, if you pay your child an amount under the standard deduction ($6,100 in 2013), they do not have to pay any taxes on the earnings and you can continue claiming them as a dependent.
Third, whatever you pay your kids is a direct write-off in your business. Just as with a normal employee, paying your kids to do work in your business is a business expense that can save you a significant amount in taxes. But unlike with a normal employee, the money being paid stays in the family!
So to recap, by hiring your minor children in your business you essentially shift money from your business to your kids, creating a tax deduction for you and (if under the standard deduction), adding no tax consequences to them. This is a pretty amazing loop hole that the IRS doesn’t offer often.
2. Create Earned Income for Your Kids
Having “earned income” may not seem important for a 10 year old, but it comes with one significant advantage; it allows them to open and contribute to an IRA.
Our country is currently in a retirement crisis. Most people wait until they are a few years from retiring to figure out exactly how they are going to fund the rest of their non-working lives. Imagine if they had started planning and saving for their retirement at 16 years old, or 10 years old or even eight years old.
That’s an advantage you can give your kids by hiring them in your business and creating earned income for them, which they can then invest a portion of in IRA’s.
3. Teach Them About Entrepreneurship
I have two kids on the way (twins, not two different women!). One of the things that has me most excited about being a Dad is the ability to teach them why being an entrepreneur is the best “job” in the world.
And what better way to teach them than to let them observe you first hand? By hiring them as your employees, you can show your kids what it means to be an entrepreneur. Or you can work them hard enough to show them why they want to be their own boss!
When my kids get here I will encourage them to start lemonade stands and other entrepreneurial activities in order to train them to run their own businesses some day. But I will also have them work for me when they are old enough. I can’t imagine a better way to show them the ins and outs of being a business owner.
Follow the Rules
In one of their few acts of kindness, the IRS has generously given business owners this “loophole” of hiring their minor children to work in the business tax free. Unfortunately, there are several people out there who took advantage of the generosity and now the IRS closely monitors minor children working for their parents.
Because of this, it is very important that you follow the rules when it comes to hiring your children. There are three basic rules that need to be followed in order to legally hire your kids in your business.
- They Must be a Real Employee- Because the benefits of hiring your kids is so great, many people have tried to say their kids were employees despite them never actually doing any work. This is a mistake. Make sure you document your kids employment with time sheets describing work they actually did in your business. It’s also not a bad idea to have them sign a written employment contract. And finally, the kid should be at least seven years of age to be considered a real employee. No one is going to believe your three year old is filing documents for you.
- They Must Have Reasonable Compensation- In order to get the maximum tax deduction, people are often tempted to artificially inflate their kids compensation. But the IRS requires that the amount you pay them be “reasonable”. This means you can’t pay them $100 an hour to answer phones for you. Find out what the going rate is for the work you plan to have them perform and stick to that range.
- All Employment Paperwork Must be Filled Out- Though the IRS lets you get away with a lot of the headaches involved with normal employees when hiring your kids, the normal paperwork must still be filed. This means you must fill out a W-4 and I-9 when they are hired and issue them a W-2 at the end of the year.
If you can follow the rules involved, hiring your kids in your business could be a huge benefit to you, your business and your kids. Who knows, seeing you run your business may just launch them into a lifetime of entrepreneurial success. I know I plan to put my twins to work as soon a they are old enough.