The Benefits of Hiring Your Kids for Your Business

Your kids can often provide insights that are missed because we are so busy running the business

(Photo courtesy of Andrea Piacquadio on Pexels)

As my business was growing, I found myself more and more pressed for time. Meanwhile, my growing teenage kids were just hanging around watching me fumble. It did not take long for them to lend a hand, first with social media, and then with the website, and then quick stops to the UPS store, and so on.

Feeling guilty, I just upped their allowance or paid for things they wanted, like gift cards and upgrading their cell phone plans. So, I was paying them for the work, but not technically. This is because, with family, this is a big gray area.

The obvious problem with this situation is that this is not unlike paying them under the table. What if something happened while they were working for me, who would be responsible? There are labor laws about working children to consider here. While I doubt my kids entertained the thought, in other businesses, children could file a claim against their parents.

On the other side of the coin, is the more intriguing question: could the situation be improved so that all of us could benefit? Specifically, could I make them regular W-2 employees to address these concerns and put more money in their pockets and mine? Indeed, this would improve the situation, in more ways than one.

After doing a lot of research and speaking to advisors, I leaped and hired my 16-year-old daughter to work in my business. It wasn’t easy, but there were some significant benefits, which I’ll talk about below.

Income is not Taxed

This is perhaps one of the biggest benefits. As long as the income is under $12,950 (for 2022), they can keep all of it without paying federal taxes. Now this is a pretty sweet deal, but there are ways to maximize that benefit further.

You can also set up a joint retirement account (children under 18 can’t do this on their own). I will be setting up a Roth IRA in a joint account with my daughter, so essentially, the money that she puts into the account is not only tax-free initially, but any earnings on the investments will also grow tax-free. We considered a regular IRA as well, but a Roth is even better.

Another option is to contribute it to a 529 college savings plan. This is very similar to setting up an IRA, so the same benefit applies to this as well, except that the 529 has more restrictions than a Roth. That said, I have talked to business owners who hired their children and then set up 529 plans so it is an option.

While our daughter won’t be earning more than $12K this year, we also wouldn’t be too concerned if she did earn more. This is because that would land her in the 10% tax bracket, which is still way below my own. Keep in mind, that only the income above the limit would be subject to the 10%, so she would still earn the bulk of it tax-free.

Other Tax Advantages

Another benefit is that my daughter’s paycheck does not have deductions for social security, Medicare, or Federal Unemployment Act (FUTA) taxes either. This is because she is still a minor and as such is not subject to these taxes. Keep in mind that with fewer deductions from her paycheck, that also means that more can go into the Roth, so this is basically a compounding of the benefit.

For me, this also simplified the hiring process a little, but I’ll talk about that later. I should also mention that if your business is a C or S corporation, then you do have to pay these taxes, but for businesses structured as a sole proprietorship, partnership, or LLC like most small businesses are, then these taxes don’t apply to minors – please check with your CPA to confirm.

Reducing Business Income

Yes, paying for your children reduces your business income, but you shouldn’t think about it that way. Reducing your business income is good for your business taxes as well. Less income = lower taxes for your business.

Now in my situation, I was already paying my daughter for the work she was doing, but instead of it coming out of my pocket and not tax-deductible, it’s now a documented business expense that is listed as an expense on my business taxes. It reduces my self-employment income, so it reduces the taxes I pay on the remainder.

Gaining Valuable Experience

When our son was applying for work outside the house, he was often overlooked because he lacked experience, and the occasional babysitting work didn’t help much. However, if he had worked in my business, he would have had some experience to put on his resume.

This isn’t just about padding a resume either. Working on a home business is also a very good experience on its own. My daughter does packing, shipping, deliveries, and inventory. She also is adept at Word, Excel, Teams, graphic design applications, and several marketing and SEO tools. She knows how to fix a computer, diagnose Wi-Fi and networking issues, and knows basic Windows server management tasks.

She also has excellent customer service, tech support, and phone answering skills. Perhaps a little less obvious is that she also has more confidence, better posture, and a more business-professional way about her that, frankly, I don’t see on the other side of the counter when I order my S'mores Frappuccino at Starbucks.

While I’m quite sure most of the skills I listed aren’t indicative of a definite career direction for her, these are great skills to have for any job. More importantly, those are skills that can be built upon for higher-paying jobs in the future.

A Trusted Employee

One of those things that aren’t immediately obvious, but I can trust my daughter fully. While there are times when we bicker, the fact is that my daughter understands fully that an unhappy customer or a financial statement that doesn’t add up impacts her as much as it impacts me.

While I have been very lucky so far, I have heard horror stories from small business owners who have had to deal with dishonest employees, workers who simply ghosted them, and even ones who filed claims against them. Those things are far less likely when you hire your own children.

Likewise, for my daughter, she has a safe and supportive place to work. She doesn’t have to worry about being shorted on her hours, being asked to work overtime without pay, or being harassed in any way. While our kids haven’t experienced anything serious like that themselves, they have friends who have; it happens. However, this is far less likely between family members.

Employee Expenses Can Be Tax-Deductible

I wanted my daughter to learn how to use Word, Excel, PowerPoint, and other Microsoft apps – apparently, schools think that Google is all the training kids need. So, we decided that she could learn these herself online.

Because those are skills that I need her to have for the business, I can deduct the expenses for her training, this includes expenses for certification exams. This benefits her because she can receive this important training, and it benefits me because I can deduct it as a business expense.

I haven’t explored what else can be considered a deduction, I’ve heard from other business owners that many other things can be deductible: books and training materials, uniforms, travel expenses, meals, and pretty much anything you would typically claim on your taxes for yourself or other employees. The big plus here is that they also benefit your child.

Unintended Benefits

When my son turned 18, we went to the bank to set up his own accounts. He also applied for a credit card, but because he didn’t have a steady income – he mostly worked odd jobs here & there – he did not qualify for a decent interest rate or credit limit.

Because my daughter is younger, I can prevent that situation from happening for her. By ensuring that she has regular, steady work in the family business, she can build up better credit. This will ensure that when she applies for her first credit card, or a loan, or whatever, she should receive better terms from the bank.

Because I need my daughter to do deliveries as well, I am expediting her driver's education training. While this is typically handled by the school, we decided to use private lessons so that she can get started with deliveries sooner. This can be a deductible expense for the business, and it benefits my daughter.

One of the requirements in California is that we need to have Worker’s Compensation insurance for our daughter. While this is another expense for the business, one I wasn’t too happy to be required to pay for, it is also a deductible expense.

Upon further reflection, though, this is also another safety blanket for the business and my daughter. It is one less thing I need to worry about as her employer, and it is something she can use if she does have a work-related injury. I recently spoke with a business owner who sells baked goods, and she was able to depend on this insurance when her own daughter was injured on the job. Insurance = peace of mind.

One other benefit that we will be looking into is to set up an individual retirement account through the business. This could increase the amount that we can deduct for our daughter beyond the $12,950 limit, to upwards of $20K. I haven’t researched this yet and is a bit more complex so it will require assistance from our CPA. This is why I didn’t mention it above, but it is another benefit that other business owners have implemented and recommended to me.

Conclusion

The bottom line is that by hiring our daughter, we are keeping more money under our roof. If we hired someone else, then the income wouldn’t stay in the family. Many of the benefits above only apply while your children are under 18, so this is something you don’t want to wait too long to decide on.

Then there are the benefits that are not as tangible and money-specific. Hiring your children also keeps expertise, trust, and peace of mind under one roof. While you can certainly hire outside employees who are trustworthy, loyal, and well-trained, there is no guarantee because they simply don’t have the same relationship with you.

More importantly, the less tangible skills above have no expiration. While our daughter is eventually going to leave as well, she will take her skills and experience with her. They may no longer benefit the business, but they will benefit her, and in a way, that still keeps them in the family.