What you need to know about hiring your kids

Insureon Staff.
By Insureon Staff
May 15, 2015
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When your school-aged children work in the family business, they can gain valuable work experience while decreasing the family's tax burden.
Baby pretending to work on a phone and laptop.

I grew up in a family of small business owners. My grandfathers, my two uncles, and my dad all operated their own businesses. In the mid 1950s, my dad opened a men’s clothing store with his father in Bayside, Queens, a borough of New York City. From the moment one of us kids was old enough to unfold a box, we were put to work during the store’s busy times – Christmas and the Saturday before Father’s Day.

If you have school-aged children, you’re most likely concerned about keeping them active during the summer months – that includes both their bodies and their brains. Why not have them chip in a few hours a day at your business and give them some lessons in entrepreneurship? It’s never too early to show your kids what your business is really about and why you work so hard.

But are your kids old enough to help with your business? And what do you do about compensation?

Actually, even minors can help out in the family business. In fact, by paying minor children, you can move family income out of a higher tax bracket (yours) and into a lower one (your children’s). It's an easy way to transfer wealth to your dependents without incurring federal estate and gift taxes.

Here’s what the IRS has to say about hiring family members:

Payments for the services of a child under age 18 who works for their parent in a trade or business are not subject to Social Security or Medicare taxes if the trade or business is a sole proprietorship or a partnership in which each partner is a parent of the child.

Payments for the services of a child under age 21 who works for their parent in a trade or business are not subject to Federal Unemployment Tax Act (FUTA) tax. Payments for the services of a child are subject to income tax withholding, regardless of age.

Wages for the services of a child are subject to income tax withholding as well as Social Security, Medicare, and FUTA taxes if they work for:

  • A corporation, even if it is controlled by the child's parent
  • A partnership, even if the child's parent is a partner, unless each partner is a parent of the child
  • An estate, even if it is the estate of a deceased parent

Also important: make sure your children are doing real jobs, not just sitting around playing games on the company’s computers. Give them specific job duties and pay them in real money (not with pizza or movie tickets). Lastly, keep the same records you do for your other employees and track their hours and wages.

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Rieva Lesonsky is CEO of GrowBiz Media, a media and custom content company focusing on small business and entrepreneurship.

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