Chances are your child or children already help out a bit in your small business operation. They may do anything from helping to carry, count, or sort inventory to answering phones and relaying messages. These are all work-related duties that they should be getting paid for just like any other employee.
Under the provisions of the Fair Labor Standards Act parents who operate a sole proprietorship, single-owner limited liability company, or spousal partnership may legally employ their child in their business. This guideline applies as long as the child is at least 7 years of age and is able to reasonably perform business-related tasks and duties.
There are certain occupational restrictions that apply to the employment of minors, however, in most non-hazardous workplace environments children can be legally employed and compensated. Additionally, there are daily and weekly work hour restrictions depending on the child’s age and school status. So definitely check the law in your state on what kind of work your child can legally perform and how frequent your child can work.
Aside from the obvious monetary benefits that the child receives, this employment situation can be advantageous to you and your child in a number of ways.
When you employ your child in your business and give them real, transferable work skills you are helping them build their resume or entrepreneur profile. This way if there is ever a need or desire for them to work for a non-parental employer they will have bona fide work experience.
Parental employment situations can also help children learn to be socially and economically responsible. If children are allowed to manage their time and income (when appropriate) they can quickly develop life skills that will benefit them for years to come.
While individuals under the age of 20 must be paid state minimum wage rates after the first 90 days of employment, it is often cheaper to pay and sustain a child’s salary in small business operations. By law, a child must be paid fair wages for the job he or she is performing and in most cases state minimum wage rates meet this requirement for entry level jobs.
In general, you want to pay your child according to industry standards for the job he or she is performing. However, an adult with household responsibilities would usually request more in the same role. Even if the adult agreed to the same wages, his employment may be short-lived with your small business if he is able to secure better wages elsewhere. So not only are you able to save on wages, you can also save on recruitment and retention costs that often plague small and large businesses alike. This is an excellent benefit in the start-up phase of your business.
Employing your child in your family-owned businesses has its share tax perks for you and your child. First, the child’s wages are exempt from Social Security, Medicare, and Federal Unemployment (FUTA) taxes as long as the child is under the age of 18. Social Security and Medicare taxes start to kick in at the age of 18, but you are still exempt from paying FUTA taxes until the child reaches the age of 21.
Additionally, if you pay your child less than $12,400 this year her entire salary is exempt from taxes per IRS rules. This guideline only applies if the child is single or married filing separately. In which case, the average child will qualify for the standard tax deduction which usually increases every year.
Second, your tax benefits will come in the form of payroll deductions. You can deduct any and all payroll expenses on your annual tax return. This includes the salary you pay your child regardless of how the child uses it. This guideline is even applicable if you qualify for a child tax credit under your small business and/or through employment.
If you are like the average entrepreneur, you want your child to eventually follow in your footsteps. This could mean either taking over the family business or building his or her own empire. Either way the earlier you start preparing your child for business ownership, the better. Your child can develop valuable skills and abilities if they start working with your family-owned business from a young age. This way if you are unexpectedly unable to maintain your business, your child can do so lending to your family’s economic stability.