If your home business is like mine, then kids are constantly running around it. And if you’re a natural business thinker with older children at home, then you’ve either considered or implemented a plan in which your children act as employees. While the tax benefits are great and so is the ability to teach your kids the value of hard work, the situation can get a little tricky if you aren’t prepared for what needs to get done and what could possibly go wrong.
To break the benefits and potential detriments down, here is a list of the pros and cons of putting kids to work in your small business
PRO: No interview process or need to insure against unmet obligations: When hiring part-time labor to help with your home-based business, you’re typically tasked with either performing background checks to the best of your ability or updating your contract management system software every six months. The process of finding quality worker can be a long and tedious one. By putting your kids to work instead, the trust hurdles can be skipped entirely.
CON: You aren’t filtering through a talent pool: When it comes to your kids, what you see is what you get. If you put them to work, it’s imperative you make sure they can get the jobs assigned to them done. By skipping a process where you interview candidates to find the best fit, you have to make sure the family members you employ are just as qualified, or else you are only hurting your business.
PRO: Your tax burden can be lessened: Multiple factors contribute to a better tax rate when you put your kids to work. Deductions exist for this situation, self-employment income is reduced, and if your kids earn less than the standard deduction of $5800, that sum is completely immune from taxation. Essentially you are laundering your taxable income through one of the most legal ways possible.
CON: Documentation is essential: On the other hand, if you plan on reaping the tax benefits of putting your kids to work, be prepared to document them just like any other part-time employee. Pay them with checks, make sure they clock-in and clock-out, and provide them with W-2s at the end of the year. Considering you would need to do this if you hired outside help anyway, it isn’t a huge deal. But people often think that because they are putting their kids to work they can just sort of pay them whatever they want, under the table even, and then collect on the tax breaks. Not so. You still need to treat them like any other employee or else you could be opening the door to a tax audit.
PRO: You get to show your kids the ropes: Whether it’s hopes of passing your enterprise along to your children someday, or by wanting to simply instill a strong work ethic in your progeny, employing your children is a great way to introduce them to the world of earning a living. While it’s important your children get to experience employment under someone not related to them, in order to get a more realistic perspective of the boss-employee dynamic, having their first few years of paid work be under your control and supervision is undoubtedly the best way to ensure they adapt an appropriate attitude in regards to labor.
If your kids are always underfoot in your attempts to grow a home business, employing them is possibly one of the best things you could do for both of you. But don’t make the mistake of blindly entering this situation without first weighing the pros and cons, and don’t simply put them on the books looking for a tax break. You still need to do what’s best for your business and your child.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.