Should you hire your kids in your business?

You may be seeing a lot of your kids these days, and you may continue to as you navigate the hybrid solutions of “back-to-school” this year.  For many business owners during this pandemic, balancing the new family dynamics with unexpected business challenges has been difficult.  While not for every business, one solution to ease the stress and get some extra help is to combine work and family lives even more and hire your kids to work in your business.

Why it may make sense to employ your children

There are some good reasons to give hiring your child a try. If the business is solely owned by you (or both parents), most of the child labor laws do not apply so even younger children can be legally employed. Employing your kids to do legitimate (i.e. skill and wage appropriate) work in your business for a few hours a week may make some financial sense for both of you.

A few of the benefits when hiring your child part-time:

• Your kids will help you and gain skills at the same time: There may be several tasks you do in your business that your teenager could do just as well, or better. These accomplishments will build their confidence, especially if there is a clear reward for their work.
• The IRS encourages business owners to hire family members. You get a break by not having to pay FICA or federal unemployment (note, they will not get any credits in these programs).
• The first $12,400 of earnings to your child won’t be taxable to them (if that is their only income, since this is the standard deduction amount in 2020) but you will be able to deduct it from your business as wages paid.

Of course, one caveat is that you have to do the paperwork to set them up as employees. Make sure you have a W4 and I-9 on file for them. Don’t skip this step!  It’s also a good idea to record their hours and pay them regularly, by check.

Better than allowance?

While every situation is different, if you typically give your kids an allowance this is a much more efficient way to “transfer” funds and get something in return. This may also help to jumpstart their entry into savings and investment since with earned income they can start a Roth IRA account or help fund their education savings.

Of course, the rules can vary depending on the type of business you own.  If your business is a corporation or you have other owners besides the parents then some of the benefits listed above may not apply.  Be sure to double-check your situation with the IRS or your tax advisor to make sure you know the latest laws and limitations.