Overview: 

When it comes to family-owned businesses, one often overlooked strategy is hiring your children. This approach not only offers financial benefits but also fosters responsibility and work ethic in your children. The tax benefits of hiring your children are compelling and may potentially lead to substantial savings for your business. Here, we will explore the advantages, including the opportunity to fund Roth IRAs for your children.

Why Hiring Your Children Makes Sense: 

Hiring your children can be an excellent financial strategy. For starters, wages paid to your children under the age of 18 are not subject to Social Security and Medicare taxes if your business is a sole proprietorship or a partnership where each partner is a parent of the child. This can result in significant savings for your business.

If you hire your children to perform legitimate work for your firm, you can deduct their salaries as a business cost. Furthermore, if your child is under 18, you are not required to withhold or pay any FICA (Social Security or Medicare) tax on their salary, with a few exceptions.

For 2024, the federal standard deduction for single filers is $14,600. If your child’s income falls below this limit, they may not owe any income tax, which can be a win-win!

Tax Deductible Wages:

One of the primary benefits of hiring your children is that their wages are tax-deductible. When you pay your children for legitimate work performed, the wages paid are a business expense, which reduces your business’s taxable income. This deduction can be substantial, especially if your children’s work warrants higher compensation. By shifting income from a higher tax bracket (yours) to a lower tax bracket (your children’s), you can take advantage of lower overall family tax liabilities. 

Standard Deduction Advantage: 

Once again, the standard deduction for single filers in 2024 is $14,600. This means your child can earn up to $14,600 without owing any federal income tax! By strategically paying your children wages that do not exceed the standard deduction, you ensure they pay no federal income taxes. This strategy can potentially result in tax savings for the family. 

Educational and Future Savings: 

The wages your children earn can be used for their education or saved for future needs. By earning their own money, children can contribute to their college funds, reducing the need for student loans and minimizing future debt. Moreover, teaching children the value of saving and investing from an early age can set them up for financial success in the long term. 

Roth IRA Contributions: 

One of the most powerful ways to leverage the earnings your children make is by contributing to a Roth IRA. The key to eligibility to contribute to a Roth is you need earned income, which the child now has.  Roth IRAs are funded with after-tax dollars, the money grows tax-free, and qualified withdrawals are also tax-free. Contributions can always come out tax free, but interest earned is withdrawn tax free if held in the account for 5 years and the account hold is over age 59 ½.  For 2024, the contribution limit for a Roth IRA is $7,000 (or $8,000 if the child is 50 or older, though this is unlikely to apply). Your children can contribute to a Roth IRA up to their earning amount if it does not exceed the annual limit.  The ability to open and fund a Roth opens a world of tax efficient possibilities for your child. 

The Power of Compounding:

Starting a Roth IRA early allows your children to take full advantage of the power of compounding. Even modest contributions made during their teenage years can grow by the time they retire.  Remember, there is no Required Minimum Distributions (RMD) for your child’s new Roth account either. 

Building Work Ethic and Financial Responsibility: 

Hiring your children teaches them valuable life skills! They learn the importance of hard work, responsibility, and financial independence. These experiences can be invaluable as they grow older and begin to navigate their own careers and finances. 

Compliance and Documentation: 

It is essential to comply with all labor laws and tax regulations when hiring your children. Keep accurate records of the hours they work and the tasks they perform. Ensure the wages paid are reasonable and reflect the work done. Paying your children exorbitant amounts for minimal work can raise red flags with the IRS. Proper documentation and adherence to fair labor practices will help you avoid any potential issues. 

Succession Planning: 

If you plan to retire soon or just want to keep the business in the family, preparing the next generation to take over is a good move (provided they are interested). Hiring your child today is the first step in this process. 

Side Note: While we discuss succession planning… Asset Strategy has a Certified Exit Planner (CEXP) that can assist with any questions you have on the sale, disposition, or succession of your business. You can learn more at https://assetstrategy.com/exit/ 

Conclusion: 

Hiring your children can be a strategic move that provides numerous tax benefits and valuable life lessons. By shifting income, taking advantage of the standard deduction, and contributing to Roth IRAs, you can significantly enhance your family’s financial well-being. Additionally, the experience gained from working in the family business can instill a strong work ethic and financial acumen in your children, setting them up for future success. 

By understanding and leveraging these benefits, you can create a win-win situation for both your business and your family. The key is to ensure compliance with all relevant regulations and to document everything meticulously. With the right approach, hiring your children can be a smart and rewarding decision that pays dividends for years to come. 


Want to talk about it?

If you have any questions about the tax benefits of hiring your children or other tax-advantaged wealth strategies, call us at 781-235-4426. 

Or schedule a meeting with one of our Advisors by clicking HEREfor a 15-minute discovery call! 

 

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Because investor situations and objectives vary this information is not intended to indicate suitability for any individual investor. 

This is for informational purposes only, does not represent legal or tax advice does not indicate suitability for any particular investor, and does not constitute an offer to purchase or sell investments.  

Please consult the appropriate professional regarding your individual circumstance. 

Advisory services are offered through Asset Strategy Advisors, LLC (ASA). Securities are offered through representatives licensed with either Concorde Investment Services, LLC (CIS), member FINRA/SIPC. 

 

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