In my article “Fund Your Child’s Roth with Chore Income,” I share a very simple Word Document pay stub for recording your child’s earnings. Here it is as a Word Document (in case you want to customize it) and here it is as a PDF. On the paystub, I recommend recording:
- When and for how long the child worked,
- What task they were doing,
- How much they were paid,
- When you paid them,
- How much of their pay was in cash, and
- How much of their pay was in non-cash.
In response to this employer pay stub, I recently received the following reader question:
On your example Household Employer Pay Stub in the article “Funding a 3-Year-Old’s Roth IRA“, what do you mean by “amount paid in non-cash”?
Technically, employers of any kind may pay their employees in what is called non-cash compensation. An example of this might be an employer giving their employee a car in lieu of a cash bonus. The car is obviously not cash. The car must be valued at fair market rates and then reported as taxable compensation the employee received for the job.
Giving your child an object they want instead of cash bypasses them actually having cash and getting to make decisions with it. Just as learning to speak would be difficult if the child was never allowed to attempt to make the sounds, so too learning to deal with money is difficult if the child is never given the opportunity to attempt to handle it. Giving your child some first-hand experience making wise financial decisions is essential.
Additionally, regardless of who the employer and the employee are, non-cash compensation is generally counterproductive. Having the employer pick a specific reward for their employee (rather than cash) is more likely to be subject to deadweight loss and be economically destructive. A car costing $20,000 may only feel like $10,000 of value to the employee. Meanwhile, $20,000 of cash feels like $20,000 of value.
Money is a placeholder of labor not yet rewarded. Paying your employees in cash enables them to decide what the best reward is.
Also, it is simpler to pay employees in cash compensation. Examples of cash compensation are physical coins / dollar bills or a direct deposit of cash into their account.
Also of note in this conversation, you can only contribute cash to a Roth IRA.
So in summary, I would recommend that you only pay your child in cash. However, it is best practice to record how much of your child’s wage was paid in non-cash on his or her pay stubs. I would recommend that you strive to pay your children $0 in non-cash compensation. Let them purchase their own rewards.
Photo by BP Miller on Unsplash