Should you hire your child? Listen here to find out the benefits of hiring your child and/or spouse as a business owner under proper circumstances:

Script:

One question that I get quite a bit from business owners is, “should I hire my child?” My answer is generally ‘yes’ as long as it is legal to do so and the amount paid to them can be justified. Same is true for spouses.

– Why?

What it does is it allows children to have their own spending money. Sometimes we think of everything within the ‘tax realm’ and once in a while we have to think of how we can give life lessons to our kids. Giving them a wage and letting them be able to spend, save, or give that wage is a good way for them to really learn those life lessons.

But I’m also a tax guy so it also works to move your income into a lower tax bracket. It also allows them to make retirement plan contributions.

– So how much can be saved in taxes by hiring your child?

Let’s just say as an example the parents are in the highest bracket and they’re at 37%. If they pay their child $5,000, that child would actually not pay any income tax on that amount because they would be in the zero tax bracket. Their standard deduction would pretty much offset that income, so in that case it’s almost $1,850 that the parent would save, just moving that from the parents’ income to the child’s income.

– What about a spouse?

Spouses is where you can really do a lot. Once again, if you can justify the amount of wages paid to them and let’s say you pay your spouse $25,000 – and I’m using $25,000 because that’s the limit you can put in a 401k if you’re 50 or older for 2019. With that amount, if you saved 37%, which would be the top bracket, you could save well over $8,000. You can do this just by paying your spouse $25,000 and having them put that into their retirement account. That would be your tax savings.

– So, I heard that children can a make Roth IRA contribution. Is that beneficial? Is that true even?

It is. So as long as that child has earned income. If you give them a W-2 wage as a business owner employing your children. If they’re cutting grass or babysitting, that’s all earned income. If you report that earned income on their return, they can take that income and put it into their retirement plan. Since they don’t need the tax deduction because normally they’re below the standard deduction, you can put it in a Roth. If they put it in a Roth, they can save that money and grow tax free for their whole life.

Another one of the things you can do with the Roth IRA, is that it allows you to take contributions out of it to pay for anything, including college. Sometimes, what I’ll suggest to clients is if they are able to hire their child, they should fund a Roth IRA for their child – and let’s say that’s $5,000. They can now at some point take that $5,000 out and use it to fund their kid’s education later on without any penalties.

– That’s kind of smart. So what needs to be done to hire your children or your spouse? What do they need to do?

As long as it’s legal and it can be justified. Those are the two big things. The legal side, you just have to make sure that they can get a work permit. Then you can hire them. I’m not exactly sure because it’s different in different industries, but you have to be a certain age to get a work permit.

The other thing is that if they are going to be an employee, you have to treat them like an employee. You have to make sure they keep a time sheet and make sure you have an accurate job description of what they actually do.

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Jeff Dvorachek
I joined Hawkins Ash CPAs in 1998. I am the partner-in-charge of the Manitowoc, WI, office and tax director for the firm. I have thorough experience providing tax services to individuals, commercial businesses, nonprofit entities and estates and trusts. I also provide compilation and review services. I lead the Tax Committee and am a member of the Information Technology Advisory Committee.

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