Bringing your children into the family business has its pros and cons that range from teaching kids strong work ethics to alienating other employees due to nepotism. Many parents may not even want their children in the family business at young age so they can focus on school. But what many business owners are not aware of is there can be substantial financial benefit for both you and your children by having them doing legitimate work in the business and paying them for it. (Yes! This will require legitimate work. Paying your kids without them completing any work will likely put you in the hot seat with the IRS).
So, what are the benefits?
Many business owners are in high-income tax brackets, if not the highest income tax bracket. For 2022, that could mean a 37% federal income tax rate (and even higher if you include state income tax, local income tax, FICA tax, FUTA tax, and net investment income tax). It is quite common for business owners to search out ways to reduce their taxable income. One potential solution is to hire your children for clerical work (please check local laws for age & job restrictions). The short and simple answer is, this transfers income from your high-income tax bracket to your children, who are in a 0% or low tax bracket.
In addition to this benefit, since your business is paying an earned wage to an employee your business will receive a deduction for this payment also! (Depending on your business structure and child’s age, there is a chance you may not need to pay FICA or FUTA tax on your child’s income either)
For your children, since they also qualify for the standard deduction under current tax law, it would reduce their taxable income to zero and they would have no ordinary income tax liability if they were a single dependent and made up to $12,950 in 2022.
But this also allows you to teach your children about the benefits of saving! If your child works hard enough and it looks like they may earn more than the $12,950 discussed above, your child also can make contributions towards a Minor Traditional IRA. In this scenario, your child would receive a tax deduction for each dollar they contribute towards a traditional IRA allowing them to maximize their annual contribution of $6,000. Now your child can earn $18,950 in 2022, maximize their IRA contribution (and learn about saving/investing), and not owe any taxes on that earned income!
The opportunities can become even larger if your company has a 401k plan with no age restriction on participation.
Overall, there are many rules and regulations to follow closely when hiring your children in the family business, but when done correctly, this can be a win-win-win for you, your business, and your children!
If you think this might be a benefit to your family and business, please reach out to your iNNOVA Wealth Partners advisor and we look forward to discussing this with you and your CPA.
INNOVA is a SEC registered investment adviser. Information presented is for educational purposes only intended for a broad audience. INNOVA is not giving tax, legal or accounting advice, consult a professional tax or legal representative if needed. The opinions expressed herein are those of the firm and are subject to change without notice. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Any opinions, projections, or forward-looking statements expressed herein are solely those of author, may differ from the views or opinions expressed by other areas of the firm, and are only for general informational purposes as of the date indicated. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.