Small Business Owners: If Your Children Are Somewhat Self-Sufficient, Hire Them!
Family businesses are relatively common in the United States. Family-owned companies account for 64% of the US GDP, generate 62% of our nation’s employment, and are responsible for 78% of job creation. You could easily say that family businesses are responsible for much of the economic success that the United States enjoys.
Yet, despite their prevalence, many small business owners are still reluctant to hire their children and put them on the payroll. Some families fear that it will lead to arguments and discontentment. Others fear that it might cause their children to lose their sense of identity. Instead of forging their way, they’re following in their parents’ footsteps.
While many of these concerns are valid, there are numerous benefits to putting your kids on the payroll – assuming they are somewhat self-sufficient already!
Teach Practical Skills
Unfortunately, many young people don’t get as much business experience as they probably should. If you were to ask a random 16-year-old, for example, all the steps that it would take to run a business, many might be able to give some vague answers. Still, not many would be able to discuss cash flow statements, articles of incorporation, income tax filings, and so on.
Learning all the ways a business works are beneficial no matter what career path your children ultimately choose. Even if they elect to become an employee and not an employer, knowing necessary skills like how to interact with bosses, the importance of pleasing customers, and worker’s rules and rights will serve them well in the future. Knowing math skills, budgeting, and computing profits and losses will ensure that they have the tools necessary to make sure their household finances are in check.
There are many practical skills that young people can learn from people in business, and hiring your children is a great way to impart those skills!
Hiring Your Child Has Tax Benefits
Your child can now earn up to $12,000 tax-free thanks to the Tax Cuts and Jobs Act of 2017. As a business owner, if you hire your child, you can treat any money you pay as a business expense (since it’s an employee wage just like any other wage).
Your child can invest that money into a Roth IRA (pick the Roth option because you’re not paying tax on the cash anyways) or use that money to save for college.
If you were going to give them that money anyways, then putting them on the payroll makes it cheaper for you to do so. Instead of paying tax on your child’s 529 contributions, if you hire him or her, you can deduct that wage as a business expense. They pay no tax on the earnings, so it’s doesn’t reduce the amount you can invest.
Of course, they have to be legitimate employees, but if you have a late high school teen or a college-age child, likely it isn’t hard to find some logical aspect of your business where they can help.
You Can Start Helping Them Save At A Relatively Early Age
Children under the age of 14 cannot work for any number of hours in a company (there are a few strict exemptions to this, but most readers will not be able to employ a child that is less than 14 years old). At 14 and 15 years old, your teen will be able to work in the family business, but they will be subject to numerous restrictions. Usually, if you structure their contributions correctly, you can pay them at least the $12,000 that they can earn tax-free. At ages 16 and up, they are free to work in your family business with very few restrictions.
Essentially, these rules mean that you can provide your children with $12,000 free of income and gift taxes per year, starting at age 14. They’ll have four years ($48,000) before heading off to college, and four years (another $48,000) when they’re in school, assuming that they have no other income.
Breaking The Poverty Mindset
The poverty mindset is, sadly, prevalent in today’s society. People with this mindset focus on scarcity. Jobs are scarce. Resources are scarce. Above all, money is minimal and incredibly challenging to earn.
Unfortunately, parents who have this mindset tend to pass it on to their kids. Many times, it becomes a self-fulfilling prophecy. Instead of realizing that there are ways to earn the money you want and live a life of abundance, people with the poverty mindset don’t see these opportunities and feel constrained.
Hiring your children helps break this poverty mindset. It shows your kids that, through hard work, determination, intelligence, and a well-rounded skill set, they can achieve anything they want. There are opportunities out there to earn more, do more, and become a better person. You’re showing your children how you have built and guided this business to the success it is today. In turn, they will internalize that they can follow their dreams and guide them to be successful.
Breaking the generational cycle of the poverty mindset will unlock a plethora of opportunities for your children and enable them to realize their dreams!
Don’t Be Afraid To Hire Your Children
By hiring your children, you are not doing them a disservice. Far from it, you’re expanding their world and opening their eyes to the fantastic, bad, and ugly of entrepreneurship. You’re showing them that following their dreams is a viable option, and they don’t have to accept any job if they don’t want to. They can always go into business for themselves.
Furthermore, with the tax benefits, you’re also saving money. If you would have given them money or put funds into their 529, you can do so in a way that keeps you having to pay tax on that money. Depending on your tax bracket and how much you’re giving your child, you could save thousands of dollars per year by having your child be on the payroll.
Hiring your children is often a win-win for you and your teenager or young adult. Consider it as a way to give them the skills they will need in the future!