How to hire your child as an employee at your small business: Benefits, laws and taxes

If your kids are old enough to work and want to contribute, is it a good idea to hire your child as an employee?

Like everything, there are advantages and disadvantages. And there are some tax and employment rules and regulations to consider when hiring your child for the family business.

Jump ahead to learn:

• Is hiring your child as an employee a good idea?
• Labor laws involved with hiring your child
• The tax benefits of hiring your child
• Can you hire your child as an independent contractor?
• What are the benefits of employing your child?
• What are the risks of hiring your child?
• How NEXT helps growing family businesses

Is hiring your child as an employee a good idea?

Many people think it’s a good idea.

There are 5.5 million family businesses in the United States, according to the Family Owned Business Institute (FOBI). The FOBI says 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. And that 35% of Fortune 500 companies are family-owned or controlled.

You may have heard of some other well-known family-owned or family-controlled companies:

• Walmart (Walton family)
• Ford Motor Company (Ford family)
• Nike (Knight family)

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.
• 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. 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 labor laws to ensure you’re staying in compliance with regulations.

As with any employee, provide the training or licensing they will need to do the job.

If it’s required by your state, you’ll also need to provide workers’ compensation insurance for them as you would any other non-family employees.

The tax benefits of hiring your child

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.

To qualify for these benefits, you need to account for your child’s work, wages and employment records just as if they were a hired non-family member.

For example, that means you complete a Form I-9 or Form W-4 like any other employee. And that you pay your family members working for your small business via check, not cash, so it’s verifiable.

1. Tax deductions

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.)

2. Payroll taxes

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.

3. 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.

4. Exceptions to tax benefits

If you have an S-Corporation or a C-Corporation business structure, 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?

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.

What are the benefits of employing your child?

In addition to the extensive tax benefits, there are other financial and business management advantages to employing a child in the family business.

1. Higher retention rates

Family firms tend to have higher employee retention rates than non-family-owned businesses. One likely reason is that workers are less likely to “walk away” from their family employer.

2. Flexibility in facing business challenges

Family-owned businesses also tend to weather economic downturns more successfully than non-family businesses. Family members tend to be more willing to sacrifice if problems arise.

For example, during a cash flow crisis, family members might be 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.

3. 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
• Negotiation
• Business resilience
• Learning the value of work and earning money
• Solving problems
• Leadership
• Job experience

Along with teaching your child these lessons, you could also help build familial bonds, which can be very rewarding.

What are the risks of hiring your child?

Hiring your child can open you up to several risks if it’s not handled correctly.

1. Tax risks

The tax benefits don’t count if your child is an employee on paper only. You need to give them a job title, job duties and keep track of their hours and earnings just like any other employee.

2. Nepotism and favoritism

A spoiled, entitled child who doesn’t fulfill their work responsibilities could be toxic to your business culture if you employ others who aren’t part of your family. 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.

3. 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 at work. It can be a fast way to build resentment and familial strife.

And if your child only ever works only for you, they might miss opportunities for other jobs and life experiences.

How NEXT helps growing family businesses

NEXT is 100% dedicated to small business. We give owners the confidence to grow their business and take smart risks.

We offer affordable and customizable business insurance coverage, including general liability insurance, workers’ compensation insurance, commercial property insurance and more.

Get a free instant quote by answering a few questions about your business. If you like what you see, buy online and receive immediate proof of insurance — all in about 10 minutes. Manage your policy 24/7, and get help from our agents when you need it.

Start a free instant quote with NEXT.