Employing Your Children: Benefits and Tax Breaks

Raising kids isn’t cheap. By current estimates, it costs a minimum of $23,000 a year for one child, but usually more, depending on your state. At the high end of the scale, the annual cost of raising a child is over $35,000, and that’s all before they get to college age.

All things considered, is it even possible to put money away for their education or get them started on retirement savings?

What if there was a way for your kid to earn their own money, help them get started on savings, and maybe solve some of your small business’s staffing woes?

That’s right—we’re suggesting that you hire your child. If your kid is old enough to work (14 for non-agricultural jobs), you can and should encourage them to do it.

If you can hire them to work for you, you can start paying into their savings immediately using vehicles like a 401(k) or a Roth IRA, which will provide them with tax-free savings after retirement. Once they move on to another employer, those accounts can be transferred to the new employer or left where they are.

The Benefits of Hiring Your Child

There’s never a bad time to engage your kids with real-world responsibilities. Plus, if you run a small business, we’d wager there are plenty of things you can have them do. Filing, tidying up, minding the store, answering phones, and anything that needs to be done on the computer are all options. If they are inclined to follow in your footsteps, it’s an excellent chance for them to learn the ropes.

Plus, if you own a business and employ your child, you can deduct their pay as a business expense. Wages paid to children under 18 are also not subject to social security, FICA, FUTA, or Medicare taxes, and since the kid will be in a low tax bracket, they won’t likely have to pay much income tax, if any. FUTA doesn’t kick in until age 21, although most other taxes start at age 18.

If their pay is equal to or less than $14,600 in 2024, no federal tax is owed. They may have to file if you pay them to that limit, and they earn money elsewhere.

Circling back to the conversation about saving for your child’s future, the money they earn can go directly into a Roth IRA, 401(k), or a 529 plan to start saving for college and build solid foundations for their future.

So, good for them, good for you. You get the extra hands you need to run your business, get a significant payroll tax deduction, and stop worrying about your kid’s financial future.

For your child, it’s a way to make extra money, learn the ins and outs of adulting, and gain some work experience to put on a resume. Even if your niche is not what they ultimately want to do, it’s a means to an end and will help them be more financially independent. With consistent contributions to their investment accounts, they can look forward to greater freedoms later in life—a point that may help you sell the idea if there is any hesitation.

Investment Ideas to Grow Your Child’s Earnings

So, let’s say you’re paying your child the maximum allowable wage of $12,600, and half of that goes into a Roth IRA. No taxes are due on wages, and the fund will grow tax-free, meaning your kid can start accessing the funds in college without paying taxes on what they withdraw.

If they already have a college fund or are attending on a scholarship, they can leave the Roth account alone, continue paying into it, and have a healthy sum when they decide to retire.

Investing a portion of the child’s earnings into a 529 Plan helps them save for their education. Withdrawing the money is tax-free if it’s used for qualified education-related expenses.

Hiring Your Child? Here’s What You Need to Know

If giving your kid a job working for you sounds doable, you’re on track to solve a lot of worries, tap into some serious tax deductions, and help them save for the future, wherever it leads.

Just understand there are a few rules when employing a minor child. Individual states have their own policies, which may overlap with federal regulations. If that’s the case, the law errs on the side of the rule most favorable to the child.

Here are some of the requirements to ensure your kid’s job complies.

·       They must be a legitimate employee with scheduled work hours.

·       They must perform a function that can be described as work. In other words, you can’t just pay them to run errands or do chores they would do anyway.

·       The child must be paid a reasonable wage commensurate to the work they do.

·       You need to maintain accurate records, including tracking time and payroll. This is the only way to prove to the IRS that they are doing a real job and being paid fairly for it.

We recommend reviewing the Fair Labor Standards Act (FLSA) Child Labor Rules Advisor, which outlines what you need to know about federal compliance.

The FLSA sets out, among other things, minimum wage, overtime rules, and any regulations relating to full and part-time work. Children 16 and over are not subject to federal work-hour restrictions, though you might want to check with your state to see if its rules conflict.

You can choose to pay your child minimum wage from the start, but legally, they can be paid $4.25 per hour for the first consecutive 90 days of employment, after which they must be paid at least the federal minimum wage.

Minor children are restricted as to the number of hours they can work and the type of work they can do and have the same rights as any other employed person.

The Bottom Line

Even if you can’t hire your kid, encouraging them to get to work and start saving is never a bad idea. Getting into good savings habits now will get them closer to their dreams, and, as a parent, that’s what we all want.

Schedule a call today to speak to us about your investment and tax planning needs.