If your kids are old enough to work and want to contribute, is it a good idea to hire your children as employees? Like everything, there are advantages and disadvantages to hiring your child to work for your business.
Additionally, there are some tax and employment rules and regulations to consider when employing your child. However, creating a true family business can be an extremely rewarding experience for everyone involved.
In this post, we’ll look at:
- Is hiring your child as an employee a good idea?
- What are some benefits of employing your child?
- What are the risks of hiring your child?
- Labor laws involved with hiring your child
- Why hiring your child gives you tax benefits
- Can you hire your child as an independent contractor?
Is hiring your child as an employee a good idea?
Many people think it's a good idea.
According to the Family Owned Business Institute (FOBI), there are 5.5 million family businesses in the United States. Family-owned firms achieve more than 6% higher returns on assets than non-family-owned companies.
Similarly, Family Enterprise USA reports that family firms generate 54% of GDP and provide 78% of new job creation. Did you know that 35% of Fortune 500 companies are family-owned or controlled?
You may have heard of a well-known family-owned company: Walmart (Walton family). Other famous family-owned or family-controlled businesses include Berkshire Hathaway (Buffett family), Ford Motor Company (Ford family) and Nike (Knight family)
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.
1. Higher retention rates
Family firms have higher employee retention rates than non-family-owned businesses. This may result from family members not being able to "quit" their families or their jobs. Still, family-owned businesses also tend to weather economic downturns more successfully than non-family businesses.
2. Tax benefits
You and your child may both have tax benefits when you hire them to work for your business. It’s best to consult with your accountant or tax preparer to maximize your tax savings since they can dig into your full operational setup.
For instance, as long as your kid is doing legitimate work, you may deduct their salary from your business income as a business expense, just as you would a non-child employee. (These deductions need to meet specific criteria.) And, if they’re under 18, you don’t have to withhold or pay FICA (Social Security or Medicare) taxes on the salary, with a couple of exceptions.
We’ll get into more tax benefits later in the post.
3. Flexibility in facing business challenges
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 more flexible with payments. As a small business owner, you can't ask a traditional employee to continue to work without pay while the business is weathering a financial crisis or other small business challenges.
4. Demonstrating your values
Hiring your child allows you to model and demonstrate your values every day. For example, you can show your child the value of:
- A committed workforce
- Business resilience
- Learning the value of work and earning money
- Solving problems
- Getting job experience working along with you
Along with teaching your child these lessons, you also help build familial bonds, which can be very rewarding.
What are the risks of hiring your child?
If you hire your child, but they don't do legitimate work, then you’ve opened yourself to several risks.
First, the tax benefits you can receive don't count if your child is an employee on paper only.
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.
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 be accused of nepotism or favoritism. While few laws prohibit nepotism, favoritism can be viewed as a form of workplace discrimination if your child isn't held to the same standards as other employees.
Relationship and development risks
You might risk problems in your relationship with your child if they become an employee.
Working could also impact your child's educational performance if their hours and duties aren't well coordinated with school assignments and responsibilities.
If your child is an adult, respecting professional boundaries can sometimes be tough, especially if you disagree on a situation. However, parenting at work is a fast way to build resentment and familial strife.
Also consider, if your child works only for you, they might miss opportunities for other job and life experiences.
Labor laws involved with hiring your child
Nearly all private employers must follow the child labor provisions of the Fair Labor Standards Act of 1938 (FLSA). In many cases, state laws mirror their federal child labor counterparts. If they differ, you must comply with the higher standard.
Family-run businesses have certain exemptions from several of the FLSA provisions.
- Age restrictions. Minors under age 16 working in a business solely owned or operated by their parents can work any time of day and for any number of hours. This is an FLSA exemption.
- Hours worked. While family businesses are exempt from the labor department's restrictions on the number of hours the owner's children are permitted to work, they must comply with state laws. Many states have working restrictions based on compulsory school attendance and high school graduation.
- Occupation. Family business owners cannot subject their children to hazardous working conditions or work hazardous jobs, as deemed dangerous by the FLSA. However, children who work in agricultural jobs for family-run businesses are exempt from the FLSA rules on restricted hours and occupations.
It’s best to check with your state’s laws to ensure you’re staying in compliance with regulations.
Why hiring your child gives you tax benefits
There are many tax benefits to hiring your minor child (under age 18) to work for your business. To maximize the full benefits, consult with a CPA who can assess your entire situation.
To qualify for 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. For example, that means you complete a form I9 or form W-4 like any other employee. Or that you pay your family members working for your small business via check, not cash, so it’s verifiable.
Your business has tax advantages because you can deduct the wages or salary that you pay your child on your business tax return as a business expense.
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 tax)
Once your child turns 18, you will need to start remitting Social Security and Medicare taxes (also known as FICA taxes). However, the FUTA exemption extends up to age 21.
Your child’s tax benefits
Your child also has some tax benefits on the money they earn working for your business. The standard deduction is $12,550 per individual in 2021, so up to $12,550 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.
Exceptions to tax benefits
What is an exception to these rules? If you have an S-Corp or a C-Corp, you need to withhold and remit payroll taxes, including employee and employer contributions for Social Security, Medicare, and Federal Unemployment (FUTA) taxes.
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?
For the most part, if your kid regularly works for you, they probably don't qualify as an independent contractor. They will also have to pay self-employment tax on the money you pay them as an independent contractor. That means, as long as you're a sole proprietor or husband-and-wife LLC, this could be a higher tax amount than even Social Security or Medicare taxes.
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.
Provide any training they need to work for your business, or licenses that they could also need. You also need to provide workers’ compensation insurance for them, like you would for non-family employees.
Family businesses can turn to NEXT for coverage
Small business challenges can seem overwhelming, and many times, our children and other family members may want to help out. If your children can work for your business, there can be tax and other financial benefits to you and them.
NEXT Insurance focuses on helping small businesses thrive. We’re 100% dedicated to small businesses, giving owners the confidence to grow their businesses and take smart risks. We offer commonly needed business insurance coverage, including general liability, workers’ compensation, commercial property, commercial auto and more.
You can start an instant quote, share details about your business and customize options before purchasing coverage. It takes about 10 minutes, and you can access your certificate of insurance online immediately.