If you’re a small business owner with simple tasks you’d like to delegate, hiring your teenage kids can be a win-win situation. Your kids learn basic job skills and earn a little money, while you get some extra office help and a business tax deduction.
Annette Nellen, professor of accounting and finance at San Jose State University, says that the main keys to hiring family members are to make sure:
Job responsibilities and hours are properly documented
Pay is appropriate for the tasks
Your kids are old enough to reasonably handle the work
“This is not a way to give your child an allowance but get a business tax deduction for doing so,” Nellen says.
With that in mind, here are some things to keep in mind when your parent-child relationship expands to “boss-employee.”
Pay the going rate
If your teen is cleaning your office and shredding documents, minimum wage might be an appropriate pay rate. However, if your teen can help you with social media, do research, tune up your computer or perform other higher-level tasks, you can pay whatever you’d pay an outside worker for the jobs, Nellen says.
You must also pay your teen actual money, notes Nellen. This might sound obvious, but there have been IRS cases of parents trying to claim that tutoring services or gift cards provided to their children were considered “pay.” Not so. “Write them a check, as you would any other employee,” Nellen says.
You should file an annual W-2 for your teen, as well as any other tax documents required by your state, Nellen says. If you’re unsure what’s needed, she suggests checking with your business tax professional. Also, when you hire kids under age 18, their pay is not subject to Medicare and Social Security taxes, Nellen says. And if your son or daughter is under age 21, their wages aren’t subject to federal unemployment taxes.
Depending on your child’s overall income situation and how much you pay them in a year, your teen may not owe any federal or state tax on their earnings from your small business, Nellen says. Your tax adviser can help you determine if this is the case.
Consider college financial aid
If your son or daughter is in college or heading there soon, keep in mind that your pay to them could affect their ability to obtain financial aid, Nellen says. Federal financial aid formulas assume that 35 percent of your child’s assets will be used for college and reduce aid awards accordingly. That means if your child is eligible for financial aid and has $5,000 in the bank from working for you, their financial aid could be reduced by $1,750 (or 35 percent). Of course, this isn’t a reason to avoid hiring your kids, but it’s important to keep in mind, Nellen says.
Don’t fret about red flags
Hiring your son or daughter won’t automatically highlight your small business tax return for an audit, Nellen says. But you do need to be able to verify, if questioned by the IRS, that the work is necessary for the business, and not make-work you’ve devised to get a tax deduction. “Many business owners hire their kids, and it’s perfectly fine as long as you do it legally and responsibly,” she says.