As a business owner, you may have considered hiring your child as an employee. Whether you need as much help as you can get, want to hire someone you can trust or think working for the family business is a valuable life experience, hiring your kids can offer several advantages. Before you officially employ your child, it’s important to understand the potential benefits – and other implications – of bringing your child into your business.
Though you may be able to take advantage of some tangible IRS benefits when hiring your kids, other benefits include succession planning and opportunities to offer your children real-world work experience.
You’ve spent years building your family business, and while you might be able to sell it, chances are you’d rather keep it in the family. As the owner of your family business, you can share your firsthand knowledge with your children and teach them the trade tricks so they can continue optimizing the business’s operations.
Bringing your child to work can help expose them to business early in life, but hiring your child as an employee can instill values and equip them with real-life experience.
While there are clear benefits to employing your child, you need to ensure the work they’re doing is age-appropriate and that you comply with all federal and state laws.
The federal government has some incentives for business owners who hire their children, but the work must be legitimate. In other words, you wouldn’t pay your child $100 an hour to shred or tidy up around the office, and you probably wouldn’t hire your 14-year-old as the company’s CFO. A more appropriate job for your child might be redesigning your company’s website, managing your social media channels or conducting market research.
The Department of Labor (DOL) has strict child labor laws through the Fair Labor Standards Act (FLSA). These laws regulate the type of work kids under 18 can and cannot do, and family members working in the family business are still subject to these laws.
According to these laws, children under 18 are usually prohibited from working in hazardous occupations, which often include processing, excavation, mining, transportation and working with most power-driven machines. (Limited exceptions may be made for 16- and 17-year-old children in genuine training or apprenticeship programs.)
Children under 16 are limited to working a maximum of three hours per day on school days and 18 hours per week when school is in session, with separate restrictions on hours worked when school is not in session. In addition to federal child labor laws, states can also enforce their own child labor laws.
The IRS offers specific guidance on tax treatment for children employed by their parents and even highlights hiring family members as an advantage of business ownership. However, the IRS still requires children of any age whose earnings exceed the standard deduction threshold ($14,600 for the 2024 tax year) to file a tax return. On earnings that do not exceed the standard deduction, you can pay your kids tax-free as family business employees. States may choose to adhere to federal standard deductions, opt for their own standard deductions, or have no standard deductions at all.
Under the Federal Unemployment Tax Act (FUTA), employers ordinarily pay unemployment taxes to the federal government. Family businesses that employ their children under age 21 are exempt from paying FUTA tax as long as the company is a sole proprietorship, single-member LLC or partnership where both parents are the only partners. It’s important to note that this exemption only applies to federal unemployment taxes, not state taxes. Some states (Alaska, New Jersey and Pennsylvania) also have employee contribution requirements for unemployment taxes.
The Federal Insurance Contributions Act (FICA) tax is a payroll tax paid by both employers and employees. The parent (or parents) and the employed child under 18 are exempt from paying FICA taxes as long as the business is a sole proprietorship or a partnership where both parents are the business’s partners. Under FICA, 6.2% of employees' gross wages go to Social Security tax, with 1.45% toward Medicare tax. Typically, employers must match this 7.65% tax, which means a family-owned business that employs one of its children under 18 can save a combined 15.3% on FICA taxes alone.
Another advantage of paying your child as an employee is that you can help them get a head start on savings. Instead of learning valuable savings lessons in theory, paying your child a salary or hourly wage can empower them to open a minor savings account and start putting away money sooner.
Since children with earned income can also contribute to an IRA, employing your child will allow them to contribute to tax-advantaged savings accounts. Employing your children can also have a place in a longer-term estate plan that includes transferring assets — including business ownership – to your children.
Generally, the minimum age for employment is 14, with certain restrictions on work for children under 18.
You can hire your child as an independent contractor, but you and your child may both miss out on tax-saving opportunities.
If you have legitimate, age-appropriate work for your child, want to bring your child into the business and understand the Fair Labor Standards Act, it may make sense to employ your child.
Hiring your kids into the family business is a great way to help them develop personally and professionally, earn income and start saving. As a business owner, you can benefit from federal tax breaks when you hire your child and potentially take advantage of succession planning and asset transfer opportunities. Whatever your financial goals, Seacoast is here to help. Contact us today about your business banking needs or to speak with an investing advisor.
Topics: Building Your Team
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