Is it a Good Idea to Hire Your Own Kids?

Hiring your own kids in your business might sound like a simple decision, but it’s layered with considerations ranging from legal compliance to setting fair compensation. It’s not just a matter of having an extra pair of hands around; it involves thoughtful planning and adherence to certain principles to ensure it’s beneficial for both parties. This comprehensive guide explores the ins and outs of hiring your kids.

Understanding the Legal Framework

Before diving into the family employment pool, it’s paramount to understand the legal landscape. This involves familiarizing oneself with child labor laws, which dictate when and in what capacities children can work, including restrictions on types of jobs and working hours, especially during the school year​​. For instance, while your eight-year-old might be eager to take on tasks, their options are limited to non-hazardous roles suitable for their age.

Employment Formalities

Employment formalities, such as filling out Form I-9 to verify identity and work eligibility, are non-negotiable even when hiring your child. This ensures compliance with federal requirements and sets a professional tone from the outset​​.

Setting the Right Expectations

Regarding compensation, the Internal Revenue Service (IRS) has clear guidelines: children’s wages must be real wages. This means compensating them with actual money rather than through allowances, such as tuition or meals, which fall under parental obligations​​. Additionally, the wages paid must be reasonable for the work performed. Paying your child significantly above the standard rate for similar jobs in your area could raise red flags with tax authorities​​​​.

Next we’ll look at some pros and cons of hiring your kids.

Pro: Retirement Savings Opportunities

Hiring your children provides them with income and allows them to start saving for retirement early. For instance, contributions to a Roth IRA can grow over time, offering a significant financial advantage in the future​​.

Pro: Tax Advantages

Employing your children can offer tax benefits for your business, such as deducting their wages as a business expense, provided the compensation is for legitimate work​​.

Pro: Skill Development and Work Ethic

Hiring your kids offers a practical platform for them to learn valuable skills and build a strong work ethic. It introduces them to the nuances of professional life, teaching them responsibility, time management, and financial literacy from a young age​​.

Con: Complex Regulations

The legal and tax implications of hiring your children are complex and require careful navigation to avoid potential pitfalls, such as inadvertently breaking child labor laws or paying unreasonable wages​​.

Con: Increased Audit Risk

Employing your kids can attract extra scrutiny from the IRS, increasing the risk of an audit. This scrutiny could extend beyond the employment arrangement to other areas of your business and personal tax filings​​.

Con: Potential for Family Tension

Mixing business and family relationships can sometimes lead to tension. Clear boundaries and expectations are crucial to maintaining a healthy balance and ensuring the employment relationship does not negatively impact family dynamics​​.

Create a Separation Between Tasks

A key aspect of successfully hiring your children is a clear separation between household chores and business tasks. This distinction ensures that any compensation for business-related work can be justifiably classified as a business expense while also teaching children the value of work beyond the home environment​​.

Create a Professional Environment

Creating a professional environment is crucial. Even though the employee is your child, setting boundaries and expectations that reflect a typical employer-employee relationship is essential. This prepares them for future professional engagements and helps maintain a fair and unbiased work culture within your business​​.

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