Although hiring your children into your small business makes tax and estate planning sense, it is not a step that should be taken lightly. Time is the most valuable commodity any of us have, and time as a child is even more precious and rare.
My father always told me that four years old is the best age because your ratio of capability to responsibility is just right. You can do a lot of things yourself but don’t have many things that you have to do yet.
Rushing your children into real work so that you can save on taxes is an example of the tail wagging the dog. You’re making all that money to support your family’s well being; it would be sad to mess up their happiness just to save a bit on taxes.
That being said here’s some advice from one daughter employee to a would-be parent employer.
Wages are better than allowance.
Wages, even ones for household chores, can teach good lessons. Allowances (occasionally giving children money simply by virtue of their family membership) has unfortunate ramifications. The unspoken lesson is that wealth is a reward of being alive. In contrast, the unspoken lesson of wages is that wealth is a reward of being productive. Wages teach your child that you can get paid to do anything that other people are willing to pay you to do, including jobs they like doing.
I want to do real work.
The IRS is not the only one who wants your children to be doing real work, most children do too. It is demeaning to get assigned a useless task at any age. If you don’t have a job of real value to delegate, then the tax savings of hiring your children is not for you. Assigning your child a useless job communicates that you don’t think they can do better, which can be damaging to your child’s future self-esteem and success.
I want it to be my job.
That job of real value you found, you have to be willing to delegate it to your child. This means that you have to let your child take ownership of it. Make it clear what you want and expect. Make sure they have the aptitude and resources to succeed. Then, don’t hover. Don’t tell them they have to go about it your way. Be there for assistance, but let it be their job. If you’ve never delegated anything in your business before, then this task will be very hard for you. It will be hard when they do it wrong. It will be hard when they do it right but use a different method than you expected. Managing employees is difficult. It is even harder when you are related. It is even harder when they are young.
These are my wages.
Once you pay your child, you have paid your child. You need to direct deposit those wages into a custodial account for their benefit. Retaining control of the money in your own name or calling family expenses like food or clothing wages is not only IRS-illegal, it is bad for the psyche. A worker is worthy of his or her wage. That includes your child. At a minimum, deposit their earnings in a Custodial Roth IRA (up to the limit). If you want to give them more control, you could fund their Roth IRA with a parental match (not from wages) and let them have responsibility for some of their own expenditures out of a custodial checking account.
I want to be worth my wage.
Both the IRS and your child want your child to be worth his or her wage. The IRS doesn’t want you to use your child to evade taxes. Your child wants their real work to really mean something to you.
I’ve heard it said that it takes two quality items out of the following three things to make a job pleasant: Pay, Hours, and Respect.
The Hours at a family business are never good for the family. You talk about work when you see one another, which is all the time. The job comes home to the dinner table. It is even there at the breakfast table. It is lying in wait behind every, “How are you today?” or “What do you have scheduled?” You never know when the time clock is unofficially ticking because you’re talking about the job over bowls of ice cream in your pajamas. If you like the work, these hours are fun hours, but the hours are still bad
That leaves only two left, so they both have to be good to have a good job: Respect and Pay.
Good pay is easy. You’re probably already inclined to compensate your child fairly.
Respect is the hard one. Your child will always have the fear: Am I only here because I am family? If you have other employees, they may even say as much to your child. That is why you need to believe that your child is worth the wage. If you don’t believe that, there’s a good chance that not only will your child dislike the job, they will have a major hit to their self-esteem from having a parent who doesn’t believe in them.
Your job might not be my dream.
Once you become your child’s employer, you are walking a tight rope. You will want to be affirming and providing performance feedback to your child as you would any employee, but you also need to make sure that your child knows that you love and cherish them and their dreams outside of the business. There is a sense in which your working children need twice as much time with you in order to know you love them. They, like all employees, want to know that their work is respected and appreciated. They also want to know that their mother and father love them as they are and support them in their unique dreams. It will build your relation up if you can manage them both as an employee at work and inspire them as a future entrepreneur at home. If your job turns out to be their dream, great! But it shouldn’t have to be.
Let me choose.
Let your child choose if they want to work for you. Let them know that they can stop working for you in the same way any other employee can. Voluntary trade benefits both sides. Involuntary trade does not. No one should feel forced.
Working together can be the best thing to ever happen to your relationship. It has been for me. Among my first jobs were helping prepare the quarterly mailing, designing our first website, and creating our logo, the Marotta wing. Now, I am the primary designer of our internal workflows, oversee the technical side of Marotta Wealth Management as our head programmer, am a regular contributor to our Marotta On Money articles, and oversee several specialties as well as the research and development of new services.
My favorite parts of the job are the ones that give me an excuse to work closely with my father, David John Marotta. He and I make a good team. We barely have to say anything in order to understand the other person. We are best friends.
I hope that your working relationship is just as sweet and you enjoy the time you have with one another.
Photo by Farrel Nobel on Unsplash