*This post may contain affiliate links.
If you're a parent with a small business, you may be wondering how to hire your kids as an employee. Besides the tax benefits, there are other huge perks to putting your little ones to work (like getting an early start to wealth building!).
I recently hired my 8-year-old and wanted to share what I've learned from the experience:
Benefits of Hiring Your Kids as Employees
First, let’s discuss the benefits of hiring your kids.
Nurtures an entrepreneurial spirit.
We often tell children to dream big. That they're capable of achieving anything their wild minds can think of, but as they get older those dreams are sucked right out of them.
I know I'm not the only one who has had the adults in their lives place their fears and limitations on me. Not to be mean, but to try to keep me "safe" the best way they knew how.
As an employee, they get to witness you making a living out of your dream.
Gives them the opportunity to be hands-on with money.
Teaching kids about money isn't the easiest. They tend to do as you do and not as you say.
Teaching them should be part lecture and part hands-on. This gives them the opportunity to implement what they've been taught by managing their own money.
Helps them develop a good strong ethic early on.
Putting your kids to work allows them to develop a good work ethic early on while teaching them that they are to be paid for their time and skills.
The tax benefits:
Each child can be paid up to $12,550 per year tax-free! The standard deduction for 2021 is $12,550 which puts their taxable income at $0.
And if their income didn’t meet or exceed this standard deduction then a tax return may not even need to be filed.
You get to deduct their income.
As their employer, you can deduct their wages which obviously lowers your taxable income. This means that if you pay your child $3000 over the year, then you can deduct that $3000 from your taxable income.
It’s possible that, depending on how much they were paid by you for that year, they pay no federal taxes AND your business gets a deduction.
No FICA and payroll taxes.
If your child is under 18, you may not have to withhold or pay any FICA (Social Security or Medicare) tax on their salary.
Depending on how your business is set up, you may not have to pay payroll taxes either! This is true if your business is:
- Single-member LLC taxed as a disregarded entity
- LLC taxed as a partnership and owned solely by you and your spouse.
Earned income makes them eligible for an IRA
This was the motivation behind figuring out how to hire kids as employees. An IRA is an individual retirement account that allows your money to grow tax-free.
To qualify for Custodial Roth IRAs the child must have earned income.
Obviously, the earlier you begin saving and investing for your kids the longer their money has to grow.
And time is everything with investing so I wanted to get a head start!
A bonus with this type of accounts is that the money can be used to pay expenses like college costs and purchasing their first home.
With any good thing comes rules!
Your children have to actually be doing legitimate work necessary for your business that is age-appropriate.
As long as they are old enough to actually perform tasks, I’d say at least 7 and up, then you can legally hire your kids.
You'll need to follow child labor laws and employment laws, and make sure their compensation aligns with the tasks they’re performing.
This means that you cannot pay them $2000 for sweeping your office, that’s not usual and it will probably create some unwanted attention from the IRS!
Additional posts to check out next!
What You'll Need to Hire Your Kids as Employees
EIN - Employer Identification Number.
If you don't have your EIN, this is a quick and easy process. You can apply directly on the IRS site for free here.
They’ll send you an email with a file attached and that document will have your EIN listed.
Complete form W-4.
Assist your child with completing this form. Have them sign and date a physical copy to keep for your records.
Keep a work log.
Keep track of the hours and tasks your child performs, along with the dates. I like to keep mine in a Google Drive folder for easy access.
Create a job description
Although not a requirement, I recommend creating a job description with an hourly rate. This should clearly detail what their duties are so they know what is to be expected of them.
Complete a W-2.
Complete and file a W-2 showing how much you paid your child or "employee."
Complete Form I-9.
You and your child should also fill out Form I-9. This is to verify the identity and work eligibility of your employee.
Job task ideas
- Model for your business website or social media pages
- Take videos and photos that you will be using for your business.
- This is what my daughter now does since she is in her tik-tok/reel phase and she’s pretty darn good at it.
- Organizing files
- Wash cars
- Mow your company’s lawn
- Hand out fliers
- Post to your social media accounts
- Transcribe video and audio (I had a mom tell me this is what her son does for her)
- The list goes and on
Learning how to hire your kids as an employee for your small business yields many benefits even beyond finances! Find a task they enjoy and let them earn!