At some time or another, almost every small business owner has considered hiring their children to work in the family business. It's an attractive idea. The concept of passing down a business to the next generation is as old as the days of settling the Old West in this country. But things are more complicated now than they were back then. Even if you're simply contemplating hiring your son or daughter for the summer, there are lots of things to think about first. The best answer largely depends on factors such as the business's needs, the children's interests and abilities and the potential tax implications.
Does Your Child Want to Work in Your Business?
Before you spend a lot of time working out if you should hire your child, consider things from their perspective. Is this something they want, or have they requested it? If so, you're lucky--the battle is halfway won. The desire to work should be supported as best as you're able, so if you can help your child find work--even in your family business--it's well worth your time considering.
If they haven't requested it, what's your best guess as to their reaction? Will they be relieved that their job hunt is over, or will they grudgingly accept, thinking they might not have a choice in the matter. This is something that only you can decide as a parent, knowing your child as you do.
Will Your Child Bring Something of Value to the Business?
Hiring anyone, including your child, costs money. You'll certainly want to pay your child a rate that's on par with what they might earn elsewhere. In return, your son or daughter will hopefully have something to offer the business. This might not be experience, but it could be something intangible, like good morale, great customer service or something similar. Consider that your son or daughter might bring fresh eyes and new ideas to your business. They might offer new ways of doing things that help your business to be more profitable.
Tax Advantages of Hiring Your Child to Work in Your Business
From a tax perspective, hiring your children can have numerous advantages. Under current U.S. tax laws, business owners can claim a deduction for reasonable wages paid to their children for work done. This helps to lower the overall taxable income of the business. If the child is under 18 and the business is a sole proprietorship or a partnership where both partners are the child's parents, the child's wages are exempt from Social Security and Medicare taxes, a distinct advantage. A benefit for the child is that, depending on their income level, children may not be required to pay federal income tax or may fall into a lower tax bracket. Of course, that benefit holds true whether your child is working for you or someone else.
There are other potential benefits for your child, too. Earned income might be contributed to a Roth IRA, which, as you know, is a powerful tool for long-term saving and investment growth. Again, this holds true no matter where your child works.
As far as legalities go, you need to be mindful of labor laws regarding the minimum age for working and maximum allowable working hours for minors. Even if it is your child, they have labor rights under the law.
Intangible Benefits For Your Child
Working in a family business provides your child with a unique learning experience that they can't get elsewhere. It offers hands-on exposure to different aspects of running a business and fosters a sense of responsibility and work ethic. Your child will be able to see exactly what you do all day, which may instill in themselves a strong work ethic that they can carry with them their entire lives. It also gives them a chance to spend a lot more time with you. They might not appreciate this so much now, but in the far future, they will almost certainly look back and value the time.
Potential Disadvantages of Hiring Your Child
Employing children also comes with a few potential drawbacks. One of these is that the IRS will scrutinize this arrangement closely. The work done by your child must be legitimate, and the wages paid must be reasonable and consistent with what would be paid to a non-family employee performing the same job. Failure to meet these criteria could result in the disallowance of the deduction and penalties. Your CPA can help you with advice about how to follow the guidelines and how to show that you are doing so.
Impact on the Family
Beyond tax implications, consider the potential impact on the family dynamics. Mixing business and personal relationships in any way can often lead to complicated situations, both at work and at home. Employing children may put a strain on relationships, especially if business issues carry over into family time, or vice versa. It's important to set clear boundaries and expectations, ensuring that everyone understands their roles and responsibilities within the context of working together.
There's also a chance that hiring your children could limit their opportunities to gain outside experiences and perspectives. Working for the family business might restrict them from exploring other career options or developing skills in areas outside the family's business scope. Again, this is a personal choice, and your situation and your child's situation will be unique to your family.
The maturity and readiness of the child to take on work responsibilities should also be considered. The child should have the necessary skills and maturity to handle the tasks assigned to them effectively. You would need to be sensitive to their level of ability to perform tasks, so that you don't overwhelm your child with job duties they can't complete.
In the right circumstances, hiring your children to work in your business can be a mutually beneficial arrangement. It can provide tax benefits to the business and valuable work and life experiences to the child. However, the decision should be made carefully, considering all factors including tax implications, potential impact on family relationships and your child's interests and abilities. Before going ahead with it, consult with a CPA so that you understand the full legal and tax implications. This way, you can be sure that you're not only in compliance with all relevant laws but also making the most of the potential benefits for your business and your family.