Many people start a family business with the hopes that one day they can employ their children. The legacy and potential for generational financial health are often motivation enough for hiring your child in your business. Many other benefits also exist, including tax breaks for you and your young one.
What you’ll learn
What you’ll learn
Key takeaways
- Hiring your children comes with several tax benefits
- Age and academic restrictions might affect hiring
- Fair compensation laws affect all employees
Still, navigating the tax laws and other legal hurdles can feel like having overdue homework a teacher is asking about. Let’s take some of the pressure off by walking you through the process of hiring your child. We’ll highlight tax implications, discuss business structures, and talk about fair compensation practices.
Additionally, we tapped OnPay expert contributor and certified public accountant Peggy James to shed light on some common questions employers have about getting help from their kids when operating a business. Peggy has over a decade of experience helping companies navigate complex tax-related matters and you’ll see her insights throughout the article below.
1. Understand the tax advantages of employing your child
If your business hires your child, there are several advantages, but the one most owners may want to take a closer look at is the tax benefit that your child’s employment reduces your business’s taxable profit. The IRS says you can deduct your child’s wages as a business expense, depending on the business structure.
Also, for a family employee under 18, you don’t have to pay FICA or FUTA tax. Children aren’t subject to social security, Medicare, or unemployment taxes, so you save money when calculating payroll taxes.
Peggy’s perspective: At what age can I put my child on payroll?
“Generally speaking, there’s no minimum age for hiring your child to work for your business at the federal level as long as it’s non-farm work, but it really depends on the type of work being performed. Keep in mind, though, that your child must be performing work in order to be paid. Some parents get creative – for example, hiring their infant as a model for marketing materials – and that’s generally okay to do as long as the pay is commensurate with the work performed.
— Peggy James, CPA
Another thing to understand is that there may be limits on the number of hours your child can work depending on their age.
2. Compare benefits for different business structures
Regardless of structure, there are many benefits to hiring your child in your business. Reduced labor cost is one significant advantage; planning together for succession is another. Still, the pluses vary based on your business’s structure.
Sole proprietorships and partnerships offer the most advantages to the owner or owners from a financial perspective. These entity types allow you to deduct the wages of a minor child as an expense, reducing taxable income. If you own a corporation, the laws are slightly more restrictive, and you may not have as many financial benefits. Still, your child could experience personal benefits, such as lower taxes, as well as experience in the working world.
Whatever business structure you adopt, keep in mind that child labor laws can be strict, depending on the state where you live and work. Before hiring your child, make certain you understand all applicable laws, including fair wage laws.
Can I hire my kids if I have an LLC?
“You may be able to hire your kids to work for your LLC depending on how the entity is set up for tax purposes. If it’s a single member LLC that’s taxed as a sole proprietor, or a multi-member LLC taxed as a partnership where both parents are the only partners, then most likely you can hire your minor child to work for your business.”
That said there are considerations you’ll want to be aware of. Once more, Peggy shares insights from past experience. “If the LLC is taxed as a corporation or a partnership with partners other than the child’s parents, though, there may be limitations on hiring a minor child to work for you.
3. Legal compliance and requirements
When hiring your child in your business, be sure to take the time to understand all relevant laws and compliance issues regarding the employment of a minor child. Non-compliance can result in fines, injunctions, or criminal penalties. Here are some important factors to consider before onboarding your child.
How do I legally employ my child?
“There are a few rules to follow, including how old the child is and how much they earn over the course of the year. There may also be labor laws in your state that further limit whether or how much your child can work for you. It’s important to understand the rules and legal obligations for your specific situation, since they can differ depending on where you and your child live and work.”
— Peggy James, CPA
As far as the logistics of hiring your child as an employee, Peggy’s suggestion might come as a surprise. She says, “I recommend treating the process of hiring your child the same as you would hiring any employee. While it can be tempting to skip a step or two in the process because you’re dealing with a family member, you and your child will be better off in the long run if you follow the same process for hiring anyone, including collecting the required paperwork such as an I-9 or W-4.”
This allows you to have a paper trail in case any questions come up later.
Overview of reasonable compensation standards
Many people think that because their child is dependent on them, they can pay them less. However, your contributions to their well-being outside the office don’t factor into their wages. While reasonable compensation standards vary based on industry, job title, and experience level, the general rule is that people must receive a fair wage for their work.
Therefore, when calculating your child’s wage, research salaries for similar positions in your area. You can use sites like Glassdoor or Salary.com. You’ll also want to consider your child’s experience, as compensation usually increases with relevant experience. Finally, consider your operation. Larger, more profitable companies can afford to pay employees more than smaller, less profitable ones.
A payroll management system can help you assess current salaries in your company and how they relate to title and experience. For example, OnPay can help automate payroll processes and analyze payment data.
Understanding labor laws affecting child employment
Child labor laws are regulations set in place to protect children from exploitation in the workplace. The laws help to ensure their safety and well-being in professional environments. While the laws can vary from one jurisdiction to the next, most focus on several areas:
- Minimum age standards: The minimum age of employment typically differs based on the type of work.
- Maximum work hours: Most states limit the number of hours children can work, especially during the academic year.
- Educational requirements: When hiring your child for your business, check the school and work guidelines. Laws are in place to reduce the risk of work interfering with a child’s education.
- Hazardous occupations: Most jurisdictions prohibit children from working in dangerous environments and professions.
With all that in mind, let’s look at some essentials of record-keeping to ensure compliance.
Record-keeping necessities
Having a minor on staff, even if they are your family, is risky. To limit risks and protect your business, focus on record-keeping. Detailed records can help you avoid potential penalties and prove compliance. Records are also essential for accurate tax filings.
When employing your child, you want several records on file. First, create a clear and thorough job description that outlines your child’s role in the company. Next, compile any documents discussing wages, including hourly rates or salary information. Finally, keep a record of all time sheets.
4. Income limits and their implications
As of 2024, the federal income tax limit for minors who can be claimed as dependents on their parents’ tax return is the greater of $1,300 or the child’s earned income for the year plus $450 , up to a maximum of $14,600. This means your child can earn up to $14,600 from their employment with you and not owe federal income tax on those wages. Any earnings over that amount are subject to tax.
The earned income limit is different from the “Kiddie Tax.” You may have heard of this tax, which is explicitly focused on unearned income or money from investments, including dividends, interest, capital gains, and royalties.
Payroll service providers can help you understand the tax laws and financial implications of hiring your child in your business.
How much can I pay my child to work for my business?
The amount you can pay a child depends on a few factors. For tax purposes, the maximum amount you can pay before the wages are subject to federal income taxes is $14,600 in most cases. Whether those wages would be subject to state income taxes depends on the state. On the other end of the spectrum, you’ll want to be thoughtful about paying a wage that you can justify – I generally don’t advise clients to pay a large salary to a child just for the tax benefit, because that could raise questions.
In other words, don’t pay your child a high salary just because you think it will help you limit your tax liability. Instead, set the salary based on the work your child is doing for your business, just like you would with any other employee.
5. Ensuring fair compensation practices
Doing payroll by yourself from start to finish can be satisfying, but it can also lead to errors or redundancies. Those hiccups can lead to unfair compensation practices. To ensure fair compensation standards in your business, focus on the following:
- Defining a compensation philosophy
- Benchmarking wages against industry standards
- Conducting payroll audits
- Creating transparent pay structures
- Regularly reviewing compensation based on performance and market conditions
You’ll also want to monitor all aspects of the compensation program and make changes as necessary. A payroll system can help you organize this process.
How much can a child earn tax-free?
“A child who’s under the age of 18 can earn wages that are exempt from Social Security and Medicare taxes. Annual earnings of up to $14,600 (as of 2024) would generally not be subject to federal income tax but may be subject to state income tax.”
— Peggy James, CPA
6. Integrating family members into your business professionally
Hiring your child in your business can present great opportunities and advantages, but be careful. It’s easy to overlook professional boundaries and play favorites when working with family. As you integrate family members into your business, establish clear rules, follow consistent hiring practices, and implement formal employment contracts.
How many hours can a child work in a family business?
“The number of hours a child can work in a family business depends on the child’s age. Under federal child labor laws, someone who’s under 16 years old is limited to working 8 hours per day and 40 hours per week during the school year. They’re also not allowed to work during nighttime hours, which start at 7pm during the school year or 9pm during the summer.”
The laws in your state may be more strict than the federal law, in which case you must abide by state law. The goal of these rules is to allow children to benefit from working while also giving them the freedom to be kids, including spending time with family and friends while taking care of their school work, too.
Bottom line: Get familiar with the steps for hiring offspring to avoid headaches
While hiring your child in your business is exciting, remember it’s still a business transaction. Failing to acknowledge the business side of the relationship can lead to compliance issues and legal troubles. Visit OnPay and discover a payroll system that helps manage payroll and ensure compliance.
Take a tour to see how easy payroll can be.
Jon Davis is the Sr. Content Marketing Manager at OnPay. He has over 15 years of experience writing for small and growing businesses. Jon lives and works in Atlanta.