Long ago, hiring your child used to be about teaching them the trade. A parent would talk passionately about how they want their child to take over the business one day. As such, they needed to see them work, be with them in ‘the trenches’ and so forth. That is still a noble idea even to this day. But there is so much more that hiring your child now offers. There are some really life-changing financial benefits of hiring your child. In this article, I will explore them, including how these are linked to tax strategizing. I am a tax professional, after all, it had to go there J.
The ‘tax link’ is an all-important starting point
This, honestly, has nothing to do with me being a tax professional. But it is fundamentally true that hiring your child as a tax strategy is the real starting point. Why say this? Well, this is because if you employ your child for the sake of preparing them for succession as it used to be long ago, your family will only realize the benefits once that child is old enough to lead the family business. Wanting this (succession) alone has some level of risk to it. What if the child grows up and does not want to run a business like that of your family? If they want their own thing, indeed, all your years of training them would have been for less. But if you hire your child as a tax strategy to create generational wealth, there will be more to benefit as soon as you hire them. Below, I explore these benefits.
Financial benefits of hiring your child
Running a sole proprietorship or a single-member LLC that pays taxes like a sole proprietorship? Or, are you a husband and wife partnership/LLC? If that is the case, you do not have to pay payroll taxes or withholding for your under 18 children. These taxes include;
- Social Security Tax
- Medicare tax
- Federal Unemployment Tax (FUTA)
When your child turns 18, you will still benefit from hiring them even though the benefits will be slightly lower than for the under 18s. For children over 18, you will need to start remitting Social Security and Medicare taxes. However, they are still exempt from FUTA until age 21.
Now to the numbers. I opened this article sharing why you should move from only targeting succession when employing your child. I am saying this because of the fact that now there are real financial benefits of hiring your child. This is even more so after the Tax Cuts and Jobs Act which took the standard deduction from $6,500 to $12,000 for individual filers, from $13,000 to $24,000 for joint filers, and from $9,550 to $18,000 for heads of household back in 2018. The standard deduction is what results in significant savings for your employed child.
If you hire three of your children and pay them $12,000 annually, that translates to $36,000. All this money is a legit business expense. As such, you can deduct it against your taxable income. Next year, when the Biden Administration’s 28% corporate tax rate kicks in, that will be a massive $10,080 ($36,000 X 28%) saved in taxes annually. In 5 years, your business can save $50,000 by just hiring your three children.
Moreover, the standard deduction is $12,550 per individual in 2021, so up to $12,550 of your children’s earnings will be tax-free. Therefore, besides saving more than $50,000 in 5 years, your family can also massively benefit from the money you pay your children, which, in 5 years, totals more than $180,000 for all three kids.
Here is how your family benefits from your children’s salaries. Even if your children are under age 18, they can also contribute some of their money to a Roth IRA. If you pay them more than the $12,550 (cut-off for standard deduction), contributing to a Roth IRA further reduces their tax bill.
In the end, they basically keep all their money. Besides a Roth IRA, kids can contribute to a savings account or an education fund. This will massively help your family when they eventually grow up, cash out their savings, buy assets or stocks, effectively building generational wealth. More so, saved education funds save the family from financial burdens when the child goes to college. The family can further invest their money and grow the business instead of paying college fees in cash.
This is how wealthy families build generational wealth. They create room for their money to grow instead of being burdened by perpetual bills. Therefore, you too, when you are old, should only be worried about estate planning rather than finding money to pay for your older children’s college fees. Hire your child now also to live this incredible life. To start your journey towards generational wealth, register for my upcoming How to Hire your Child Masterclass. Visit this page to register. It will only take a moment to create a fantastic future for your family.
People have also asked the following
- What are the Tax Benefits of Hiring Your Children?
There are two main tax benefits of hiring your child. 1. Their salary is not subject to social security, Medicare, and FUTA taxes. 2. You can deduct their salary as a business expense.
- Why It’s Tax-Smart to Hire Your Children?
Hiring your children does not only result in tax savings but the money you save is kept in the family. For example, if you pay one child $12,550 in 2021, that will be a full tax deduction, but the money remains in the family through your child.
- Is Hiring Your Child as an Employee a Good Idea?
Yes, this is an excellent idea for both the child and the family.
- What Are Some Benefits of Employing Your Child?
Besides financial benefits, hiring your child also provides more advantages for both the child and the family. For example, it results in outstanding family bonds as well as helping the child become financial-savvy.
- What Are The Risks Of Hiring Your Child?
There are no known risks of hiring your children. Hiring them results in several tax benefits and other benefits, such as learning how to run a business at a young age.
