May 9, 2022

Have you ever wondered how you could involve your kid in your business, so he learns the important tenets of business and dealing with people even as a young child? This way, he develops an entrepreneurial spirit and important experience that helps throughout his life. But even better than just having your kid help and learn as he contributes to your business is being able to pay him for it.  

It's an effective way to save on taxes as you teach your kids important work ethics and financial literacy. Imagine setting up your kid to become a millionaire or owning their first rental property while saving thousands in taxes. Having your kids work with you is also a great way to demonstrate values such as leadership, negotiation, and business resilience. They can contribute to the business more than an outsider might and help you overcome some challenges. Kids these days also have bright ideas! So, they can contribute to ideas that’ll help the business scale.

This article discusses strategic ways to build generational wealth by paying your kids to work in your business. We discuss the legal requirements, upfront tax savings, and ways to leverage this strategy to build generational wealth.

Taking the Steps to Building Generational Wealth by Employing Your Kids 

1. The Upfront Tax Savings

The standard tax deduction for single taxpayers in 2022 is $12,950. This means that you can pay your child almost $13,000 annually or about $1,079 monthly without them owing any tax on their salary. And if your kids are less than 18 years, you wouldn’t have to worry about paying for social security, Medicare, or Federal Unemployment Tax Act (FUTA) taxes. Even if you pay them more than $12,950, they’ll only be taxed on the excess.

If you are in a 22% tax bracket, you would be saving $2,849 annually by paying your child the max of $12,950, and you’d be saving $4,792 if you are in the 37% tax bracket. Over the years, you would be growing your child’s income and your savings as well. You can have a personal savings of more than $10,000 to invest in five years. You can invest in your business, your child’s education funds, a trip, or stocks, just with your tax savings. The possibilities are limitless.

2. Roth IRA Account

Because your child has earned income in salary or wages, they can open the Individual Retirement Account (Roth IRA), which is a great way to save. The whole salary they earn can go into this account without any taxes or penalties. Once the money is in their account, it can be invested and grow tax-free. The child can withdraw the money after five years to fund an investment, his education, or her first home.  

What can they do with the money?

The contributions to the Roth IRA account can be withdrawn, tax and penalty-free, for any use whenever they want. Thus, the contributions can help fund a business opportunity or be used to travel once they mature (of course, the earnings can too, but not tax and penalty-free). Although, they can use up to $10,000 of the earnings from the account, tax, and penalty-free, towards purchasing their first home.

Another way to use the account is for qualified education expenses if they go to college. Education expenses are exempt from the 10% early withdrawal penalty. Although, they’ll be required to pay income tax on the portion withdrawn from earnings.

They can also use their ROTH IRA as a head start on retirement savings. If you contributed $6,000/year for 11 years (by paying your child from age 7 to 18) to a Roth IRA and were able to earn an 8% return, the account would have a total balance of $99,873; a total of $66,000 in contributions and $33,873 in earning. This isn’t a bad start for an 18-year-old. Apart from funding their education, they could consider many investments, one of which is investing back in the family business by starting a franchise or finding a way to scale the business.

Is it Legal to hire your children to work in your business?

According to the Fair Labor Standards Act of 1938 (FLSA), hiring a minor under 18 is legal without a time or hourly restriction as long as the business is owned and operated by a parent/legal guardian. However, this shouldn’t affect their school attendance or graduation.

It's also important to be mindful of the jobs of responsibilities you assign to them and how much you pay them. For example, it’s unreasonable to pay your child $50 an hour to do yard work or file papers to increase your tax savings. The authorities are well aware of the advantages of employing your family and how people may try to take advantage of it illegally. It’s important to stay within the limits of the law. A good litmus test is to imagine what you would pay your neighbor's kid to work in your business. Pay your child the same as you’d pay the outsider.

While you shouldn’t expose the child to hazardous work or work that’ll affect their health and safety, responsibilities can include property management, social media handling and marketing, landscaping and maintenance, cleaning, data entry, and some administrative work.

Are there any downsides to employing your children in your business? 

There are several advantages to employing your children in your business. However, you’ll have to comply with federal and local labor laws. This means paying worker’s compensation if your state laws demand it. You’ll also have to hire a payroll company to issue them a W2, and lastly, the hours that your children work will take away from your material participation hours in your rentals.

In conclusion, your child can always learn from your business and growth! Get them on that path early, immerse them in the financial world, and help them build an investment portfolio that’s just as good as a trust fund while imparting important life and business values to them.