Earlier this year, I spoke with my accountant about tax planning for the coming year. He suggested that I hire my son to do office-type tasks for my home business, and that I pay him an hourly rate. At the end of the year, I could issue him a W-2 and claim a deduction for what I paid him. I came home, excited about the idea, and I explained it to my son.
He was equally excited, since this arrangement gives him the chance to earn extra money. As we’ve implemented this plan, I’ve been careful to follow the guidelines given to me by the accountant. Before you hire your child, here’s what you need to know:
What’s Your Business Organization?
First of all, realize that your business cannot be a corporation if you want to hire your child as an employee to work for you without paying employment taxes. If you are a corporation, you need to double-check the applicable federal and state laws, and pay Social Security and Medicare taxes on the wages your child earns in your company.
When hiring your child, especially if he or she is under the age of 16, you are best off if your business organization is a sole proprietorship, partnership, or LLC.
Essential Work and Reasonable Pay
Understand that you can’t have your child clean your office bathroom and pay him or her $30 an hour to do so. Guidelines indicate that the work your child does must actually be essential to the business. Handing out flyers, filing, and similar work are all acceptable. My son takes care of filing and other administrative tasks that I would have to do, but don’t need to now, because I have him.
I also pay him a “reasonable” wage. It’s not “reasonable” to pay a beginning office worker $30 an hour. His hourly pay is much more in line with what’s “normal” in our local area for similar work.
Keep Good Records
Of course, you have to keep good records. Anytime you have a situation in which you are doing something with taxes, you need good records. My son has a timesheet to fill out each time he “clocks in” for work, and I pay him every other Friday — just as I would any other employee.
If you have a payroll service or software that handles your payroll, you need to make sure that you add your child appropriately, and pay your child from that account. I pay my son from my business account, and some of it is diverted to a custodial Roth IRA, just as if he had a payroll deduction for a retirement plan (although this isn’t the same thing).
Hiring your child can be a great experience for both of you, and have great long-term benefits for your business and your child. Just make sure you do it right.