Business owners who are looking to bring on their next employee might be smart to keep it in the family, especially if they’re worried about taxes.
A recent survey of small business owners by Bank of America found that 29% of female business owners and 18% of male business owners currently had at least one of their kids working for their business. While some of those child employees might be charity cases, where a parent has handed out a cushy job to a kid who couldn’t hack it in the real world, in most cases, nepotism probably isn’t driving the decisions to hire close relatives. Bringing kids into a family-owned enterprise is actually a savvy business strategy that can come with big financial and personal benefits.
For one, the financial rewards of hiring your children can be huge, both for you and for them, particularly in the form of tax perks for child employees. That’s particularly good news for the 20% of small business owners who named taxes as their biggest problem, per a survey by the National Federation of Independent Businesses.
In addition to tax breaks, hiring your kids can come with other less tangible, but no less valuable, benefits, such as giving children a strong work ethic or preparing them to take over management of your company. We’ve put together this list of some of the surprising benefits of bringing the kids into the business at an early age, whether you’re a sole proprietor running a home-based business or the head of a successful corporation.
1. Get a tax break
Tax breaks are one of the biggest reasons many small business owners hire their children. If you own a business and hire your kids to work for you, you can deduct the money you pay them as a business expense. Plus, your kid can shield up to $6,300 from federal income tax (the amount of their standard deduction).
The benefits are even greater if you’re a sole proprietor or if you and your child’s other parent are the sole partners in the business. In that case, wages paid to your children under the age of 18 are exempt from Social Security and Medicare taxes. If your child is younger than 21, their wages are also exempt from federal unemployment tax.
When hiring your kids, keep the following tips in mind to avoid running afoul of the IRS:
- Make sure they are doing a real job. If you hire your child to manage your company’s social media accounts, for example, they need to actually be updating Facebook and Twitter.
- Pay your child as you do your other employees. Don’t try to get away with paying them in pizza, as one small business owner in Washington did. A tax court judge said no way, and ordered her to pay $20,000 in back taxes and penalties, The Wall Street Journal reported.
- Pay a reasonable wage for the work being performed. You could draw some unwanted attention from the IRS if you hire your kid as a $100-per-hour envelope stuffer.
- Keep the same records as you would for other employees. Track when and for how long your child works, and how much he or she is paid. And don’t forget to file a W-2 with the IRS.
2. Provide kids a leg up on retirement
Retirement may be decades away for your kids, but that doesn’t mean it’s too early to start planning for the future. Give your kids a head start in the retirement planning race by setting them up with a custodial Roth IRA. Then, set aside any money your child earns, up to the annual contribution limit of $5,500, in the account.
The money in your child’s Roth will have decades to grow, and once they do reach retirement, they’ll be able to make tax-free withdrawals. “Even a small contribution now can add up to big bucks in the future, tha nks to the power of long-term compounding,” writes Mary Beth Franklin in Kiplinger. Plus, setting up your child with an investment account at a young age is a great way to teach them about risk, return, diversification, and other investing concepts, valuable lessons they’ll be able to use when they set out on their own.
3. Teach them a strong work ethic
Most parents want to give their children the skills they need to be independent and successful adults. Giving them a job as a child could be one way to do so. A study by Harvard researchers found that acquiring a strong work ethic in childhood had a significant positive effect on a person’s mental health as an adult.
Hiring your child to work for you can teach them punctuality, responsibility, and how to work with others. It can also help them understand the relationship between working hard and earning money. But you must set clear expectations if your goal is to instill a strong work ethic in your child employee. Hold them to the same standards as you would anyone else who was working for you. Your child should adhere to a set schedule and be expected to perform assigned tasks competently. Don’t let poor work slide just because an employee is your kid.
4. Help them decide on a career path
Hiring your children to work for you when they are young can be a valuable way to teach them about your business, as they’ll get an inside look at what really happens at your company and what employees do on a day-to-day basis. This is valuable for a number of reasons. For one, it can help them get excited about the possibility of one day working for the company in a more formal capacity. “Earning a few dollars and enjoying the experience can go a long way toward forming a positive attitude about your business,” writes Wayne Rivers, president of the Family Business Institute.
Second, hiring your child to work for you can give him/her and you a sense of whether joining the family business is really the right career path. “[I]t’s healthy to expose them to the company at an early age, so that they can make an informed decision about whether to pursue a career there,” said George Stalk and Henry Foley in an article in the Harvard Business Review.
5. Prepare them to take the reins
Succession planning is a huge challenge for many small companies, with 70% of family-owned businesses never making it to the second generation, according to a report in the Harvard Business Review. Handing over control to unprepared family members is a major reason small businesses fail. One quarter of unsuccessful family business transitions are due to heirs who weren’t adequately prepared to take over, according to a report by Abbot Downing.
If you want the business you’ve built to survive after you’re gone, grooming your children to take over is a must. “On-the-job training in every department or area you can think of is essential” if you eventually want your child to be able to manage the business without your help, notes Entrepreneur magazine.