How Employing Your Children Can Keep Wealth In Your Family

Karla Dennis, EA, MST & CEO of The Award Winning Tax Accounting Firm Karla Dennis and Associates Inc. — Specializing In Tax Planning

If you’re a business owner, there comes a time in your life when you ask yourself, “How can I keep wealth in my family?” Chances are you may have recently asked yourself this question because you have children and want to learn some simple yet powerful strategies to keep money in your family and even create generational wealth.

If you are a parent with children who are under age 18 but old enough to perform ordinary and necessary tasks for your business, this tip may be for you. One of the things business owners can do is hire their children, and yes, this is completely legal. But note: 14 is the minimum age at which you can legally employ your children, according to the Fair Labor Standards Act (FLSA). This means you can hire your children who are under age 18, and you do not have to pay any payroll taxes for having them on your payroll.

Another benefit of having your children work for you is it gives them a chance to start saving money. They can also contribute to their own retirement account and can even contribute to a Roth account. When they contribute to a Roth account, they are growing their wealth tax-free, and when they take distributions from it down the road, they won’t have to be concerned about paying taxes on that money.

Now, you may be thinking to yourself, “What about my adult children?” Well, you can also employ your adult children. There is one caveat when you employ your adult children: You have to pay payroll taxes. What are payroll taxes? Those are the Social Security and the Medicare taxes that come out of your paycheck every time you are paid.

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You still may want to pay your kids, though. Why is that? Because if you’re looking to put your kids through college and you’re looking for a way for that to be tax deductible, you can pay your kids an honest wage for doing an honest job with an honest job description. For example, I hired my children to take coffee orders and organize the office when they were around 14, eventually promoting them to answering phones and managing the front desk by 16. Your child should be getting paid a wage that is typical for the type of work they are doing, and their job should have a legitimate purpose within your business. Then your kids can take that money and pay for their own college or even pay for their own down payment on a home. By hiring your adult children, you are able to transition money to your children and keep wealth in your family.

But what if your business is incorporated; could you also pay your kids? Absolutely. The key is if you pay your children in an incorporated business, you will have to pay Social Security and Medicare taxes, but your children might not still have to pay income taxes (depending on how much you pay them). For example, if your child is over 18, filed their taxes as an individual and you pay them up to $12,550 (the standard deduction for single taxpayers in 2021), they might not have to pay income tax. So paying your kids has its benefits if you know how to leverage it.

The other thing you might want to consider is layering in another entity to keep wealth in the family. That’s because if you have a secondary entity where you are consulting one business to another, you can transfer money between companies and keep the overall tax low. You can do the same with your children by establishing a business under their names and transferring money over to their business. Doing so would lower your overall family income and, as a result, lower the family’s taxes, which is something to ultimately consider when keeping wealth in your family. 

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.


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