How so, you could ask. Well, this article aims to outline all of these benefits, and, I believe that this will help you speed up that process to hire your children. Nevertheless, you just ought to do it lawfully, which is the only way that guarantees these financial rewards for hiring your child in your business.
The benefits of hiring your child
- Reduces your taxable income through their wages – meaning you end up paying less taxes
Previously, I spoke to my clients and emphasized just how having your, for example, 3 kids working for you reduces the money that you pay to the IRS. Here, we are talking of around $8,000 tax savings every year, meaning that in 5 years, you could save more $43,000 with your 3 kids working for you. How does this really work? Well, your underage kids’ salary from the business is accounted for as legitimate business expenses. As such, they significantly reduce the amount that you end up declaring as profits. Now, that effect results in you paying less taxes to the IRS.
Consider this example, assume you have a 14-year-old daughter that you pay $6,000 over the course of the year to work for you. And, let’s also assume that she is in the 35 per cent tax bracket. So, with the assumption that the money that you pay her would have, otherwise, been part of your earnings, and also taxed at 35 per cent, you see that you earn $2,100 (35% of $6,000) in savings.
So, this not only applies to the child that earns below the standard deduction, but you can also reduce your taxable income by paying her above the standard deduction amount. As a minor in the lower tax bracket, she could be taxed at 15 per cent, or even 10 per cent, and still result in you having to pay less tax.
- You got money to reinvest in your business
According to the IRS, payments for services rendered by a child under the age of 18, working for their parent(s), aren’t subject to Social Security and Medicare taxes. This applies if your business or trade is a sole proprietorship or partnership where each partner is the parent of the child – and I know that many of my clients will fit in these categories.
And, the payments for services rendered by a child under the age of 21 aren’t subject to the Federal Unemployment Tax Act (FUTA). Therefore, this all saves you money to reinvest in your business.
I speak to a lot of you small business owners and have realized that many struggle with working capital. In many cases, people just labor through a number of years to raise the initial capital. But when it comes to funding the ongoing operations of the business, many get stuck.
But, with hiring your child and saving money, like the $8,000 per year in our first example with 3 kids, you could have a lot to reinvest in the business. There is nothing as small money in business, especially considering that this is the money you were going to lose to the IRS anyway.
- The kids could kick start a healthy retirement fund for themselves
When you pay your kids, there is an option to encourage them to start contributing to their Roth IRAs, which are tax-free. If they do this well in their teens, we could be talking about tens of thousands of dollars when they reach retirement age. Roth is a very good long-term investment vehicle for your child, if they do it well, they could have a good life post-working.
For children, they could make annual contributions of at most $6,000 or the equivalent of the amount that they earn. For example, where a child earns $4,400 per annum, she can only contribute up to that amount to her Roth IRA. And, if she earns $7,000 per annum, her contribution will, unfortunately be maxed at $6,000 because even though she earns more, the limit that she can invest is only $6,000.
I understand that getting your kids to invest all their earned money could be a huge ask, given their love for malls and finer things of life, but if you can manage to hire them and encourage them to make $2,000 contributions to their Roth per annum for 5 years, that will be $10,000 saved in five years. Double that to ten years, that will be well over $20,000 because as they grow up, their annual maximum contributions will be increasing too. So, think about it this way, that retirement age is around 60-65 years, how much money would they have saved if they started at 15 years old?
- You get to keep some of your money in your household
Generational wealth is created slowly, and this takes you to be undergoing constant savings and investments when the time is right. Hiring your child helps you accelerate the savings process as has been already alluded to, and it also helps you speed up the level of reinvesting in your business. In this way, you get to keep more money circulating in your own family, for you and for generations to come. When I say this, I do not only mean the money that you keep from what you were supposed to give to the IRS as taxes, but also the money that you actually pay them, because if they save it, it stays for their use in the future when they continue building generational wealth.
More benefits of hiring your child
Besides all these financial benefits for hiring your child, below I list some of the other benefits that you can expect if you successfully hire your own child in your business;
- The child’s professional history gets a boost
- You train your child responsibility to fill the need when it arises
- Your children learn how to safeguard their generational wealth at a young age
Small Copy for the article
One of the most talked about advantage of hiring your own children is the tax advantage that this comes with. But, besides the tax savings, there is also more to letting your child work in your business.