Hiring your kids

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southwest_stacker
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Hiring your kids

Post by southwest_stacker »

I have my own business with 9 employees.

We max out every tax advantaged investment option we can as well as maxing out coverdells each year for our kids.

I was thinking I would like to hire my kids to do basic stuff around the office and officially pay them as W2 employees so that they could open up Roths. Given the powers of compounding if they worked for me from say 12 to 18 and maxed a Roth each year I am thinking this would practically take care of retirement for them. At 10% average return it would be over 3 million dollars at age 62.

Anyone ever do this? I am not sure about the laws on hiring them and also paying them way above what the work they are doing is worth. I don't know if the IRS scrutinizes this type of thing as in a way it is pushing income away from myself which is taxed at a higher rate and giving it to a child whose tax rate is very low.
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Chan_va
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Re: Hiring your kids

Post by Chan_va »

southwest_stacker wrote: Anyone ever do this? I am not sure about the laws on hiring them and also paying them way above what the work they are doing is worth. I don't know if the IRS scrutinizes this type of thing as in a way it is pushing income away from myself which is taxed at a higher rate and giving it to a child whose tax rate is very low.
What you are describing is tax fraud.

If you pay them a fair market wage, then it's fine. When you run your projections, just factor in inflation. $3M 50 years from now wont have the purchasing power it does today.
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southwest_stacker
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Re: Hiring your kids

Post by southwest_stacker »

Chan_va wrote:
What you are describing is tax fraud.

If you pay them a fair market wage, then it's fine. When you run your projections, just factor in inflation. $3M 50 years from now wont have the purchasing power it does today.
That is what I was wondering. I was not going to pay them something astronomical probably just 6k a year or something so it would be enough to cover the payroll taxes and Roth.
flyingbison
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Re: Hiring your kids

Post by flyingbison »

southwest_stacker wrote:
Chan_va wrote:
What you are describing is tax fraud.

If you pay them a fair market wage, then it's fine. When you run your projections, just factor in inflation. $3M 50 years from now wont have the purchasing power it does today.
That is what I was wondering. I was not going to pay them something astronomical probably just 6k a year or something so it would be enough to cover the payroll taxes and Roth.
If you hired them, and they worked enough to earn 6K, how do you know they would want to put their money into a Roth?

ETA: Even at $10/hr they would have to work 11 hours every week, all year long, to earn that 6K.
Last edited by flyingbison on Wed Sep 10, 2014 11:18 am, edited 1 time in total.
Grt2bOutdoors
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Re: Hiring your kids

Post by Grt2bOutdoors »

Why not just open a low-cost variable annuity?, stuff it with money and at age 60 I'm sure they'll have $1.5MM or more.....
Or....stuff a UTMA account with a few thousand, each year declare up to $2K of tax free income either by realizing capital gains and/or dividend income, at age of majority and assuming children are working legitimate jobs use those funds to seed the Roth accounts at that point?
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leonard
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Re: Hiring your kids

Post by leonard »

southwest_stacker wrote:I have my own business with 9 employees.

We max out every tax advantaged investment option we can as well as maxing out coverdells each year for our kids.

I was thinking I would like to hire my kids to do basic stuff around the office and officially pay them as W2 employees so that they could open up Roths. Given the powers of compounding if they worked for me from say 12 to 18 and maxed a Roth each year I am thinking this would practically take care of retirement for them. At 10% average return it would be over 3 million dollars at age 62.

Anyone ever do this? I am not sure about the laws on hiring them and also paying them way above what the work they are doing is worth. I don't know if the IRS scrutinizes this type of thing as in a way it is pushing income away from myself which is taxed at a higher rate and giving it to a child whose tax rate is very low.
Consult your CPA to make sure everything is legal.

One non-finance thing. It is extremely valuable for kids to go work for someone else for a while - in the "real world" even if the plan is for them to take over the family business.

I think kids need to learn the responsibility that comes with a job. Family dynamics can undermine that experience.
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southwest_stacker
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Re: Hiring your kids

Post by southwest_stacker »

flyingbison wrote:
If you hired them, and they worked enough to earn 6K, how do you know they would want to put their money into a Roth?

ETA: Even at $10/hr they would have to work 11 hours every week, all year long, to earn that 6K.

I was thinking along the lines of a salary of $500 a month and then they help do whatever. At 12 years old they don't get much say so in what the money is for. As they get older I was thinking they get raises so they have walking around money with the understanding the roth still gets maxed.
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bertie wooster
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Re: Hiring your kids

Post by bertie wooster »

southwest_stacker wrote:I am not sure about the laws on hiring them and also paying them way above what the work they are doing is worth.
Since the whole point of this endeavor is to pay your children to do essentially nothing I would avoid this as it is blatant fraud.
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southwest_stacker
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Re: Hiring your kids

Post by southwest_stacker »

bertie wooster wrote:
southwest_stacker wrote:I am not sure about the laws on hiring them and also paying them way above what the work they are doing is worth.
Since the whole point of this endeavor is to pay your children to do essentially nothing I would avoid this as it is blatant fraud.
I am not going to pay them to do nothing. We have 5 company vehicles, and about a dozen pieces of machinery. I can envision them washing these and cleaning the interiors on almost a weekly basis. There is lots of paperwork that needs to be organized and scanned in on a regular basis. They will definitely be working but I can't say that they will do $500 worth of work every month.

I certainly don't want to do anything illegal but at the same time I want to take advantage of every thing I can within the law.
Gropes & Ray
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Re: Hiring your kids

Post by Gropes & Ray »

It's not fraud as long as the kids actually do work. I just wouldn't pay them above market rate. At 8/hr, they would make $6000 in 750 hours. That's probably more than a 12 should be working, but even funding half of the roth could be a huge head start. If you live near a city with an inflated minimum wage, you may be able to pay them more.

Take a look at child labor laws. Family businesses are often an exception, but you may need permission of their school guidance counselor in order to employ children under 14.
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southwest_stacker
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Re: Hiring your kids

Post by southwest_stacker »

I get what you are saying but that does bring up an interesting point. Can the government really dictate what you can pay someone? As long as you are paying all the payroll taxes and the person is issued a W2 it seems you should be able to pay them what you want.
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Re: Hiring your kids

Post by livesoft »

This is so common that I am surprised that the OP's accountant did not already suggest it. Many kids work. I had two paper routes (morning and afternoon) when I was a kid. I worked in a restaurant and the owner's kids also worked there.
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barnaclebob
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Re: Hiring your kids

Post by barnaclebob »

southwest_stacker wrote:I get what you are saying but that does bring up an interesting point. Can the government really dictate what you can pay someone? As long as you are paying all the payroll taxes and the person is issued a W2 it seems you should be able to pay them what you want.
The government isn't dictating what he would pay his kids but if the IRS decided to audit him about how a 12 year old has 5k of earned income then they can make a judgement of it being fraud based on the intention that the high pay is just to put it into tax sheltered accounts.
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tadamsmar
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Re: Hiring your kids

Post by tadamsmar »

Hiring your kids can be a good legal tax avoidance procedure, here is something on how to keep it legal:

http://www.nolo.com/legal-encyclopedia/ ... ldren.html
freddie
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Re: Hiring your kids

Post by freddie »

Gropes & Ray wrote:It's not fraud as long as the kids actually do work. I just wouldn't pay them above market rate. At 8/hr, they would make $6000 in 750 hours. That's probably more than a 12 should be working, but even funding half of the roth could be a huge head start. If you live near a city with an inflated minimum wage, you may be able to pay them more.

Take a look at child labor laws. Family businesses are often an exception, but you may need permission of their school guidance counselor in order to employ children under 14.
You also need to enroll the kid in the companies ROTH 401(k). I think you can make 6k, contribute to the ROTH and then have dad give the kid 5 of for the ROTH IRA.:)

This type of income shifting (you really want to exploit the kids 10-15% brackets also) happens all the time. It really comes down to how much work the kid can do and how much you can justify paying for it. Paying him 10k to model for your website is probably pushing it.
FreemanB
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Re: Hiring your kids

Post by FreemanB »

southwest_stacker wrote:I get what you are saying but that does bring up an interesting point. Can the government really dictate what you can pay someone? As long as you are paying all the payroll taxes and the person is issued a W2 it seems you should be able to pay them what you want.
The problem is that there are many ways to abuse a system where payroll is entirely arbitrary.(One benefit is that paying your child $5500 means that you pay that much less are your marginal rate, while the child pays virtually nothing thanks to their standard deduction) Because of this, the IRS is fairly strict about ensuring that it is both a real job and that the pay is a fair market wage for the work. You can do it, but you had better be prepared to justify it, particularly when you do it for multiple kids. It may be tough to justify that many positions in a small office environment.
flyingbison
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Re: Hiring your kids

Post by flyingbison »

southwest_stacker wrote:
flyingbison wrote:
If you hired them, and they worked enough to earn 6K, how do you know they would want to put their money into a Roth?

ETA: Even at $10/hr they would have to work 11 hours every week, all year long, to earn that 6K.

I was thinking along the lines of a salary of $500 a month and then they help do whatever. At 12 years old they don't get much say so in what the money is for. As they get older I was thinking they get raises so they have walking around money with the understanding the roth still gets maxed.
You'd have to pay them an hourly rate for hours they actually worked, unless the position was FLSA exempt (a difficult, if not impossible standard to meet for a job a teenager is going to have). Also not sure it would be legal to hire a 12 years old for very many jobs.
avalpert
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Re: Hiring your kids

Post by avalpert »

southwest_stacker wrote:
flyingbison wrote:
If you hired them, and they worked enough to earn 6K, how do you know they would want to put their money into a Roth?

ETA: Even at $10/hr they would have to work 11 hours every week, all year long, to earn that 6K.

I was thinking along the lines of a salary of $500 a month and then they help do whatever.
If you wouldn't hire not family at that rate you shouldn't hire family at it.
At 12 years old they don't get much say so in what the money is for.
Legally they certainly do - not only can you not force them to put it into a Roth you cannot legally dictate how they use the money if they do put it into a Roth.
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Re: Hiring your kids

Post by avalpert »

southwest_stacker wrote:I get what you are saying but that does bring up an interesting point. Can the government really dictate what you can pay someone?
Minimum wage laws...

But that isn't what is going on here anyway - they aren't dictating what you can pay someone they are (rightfully) seeing the level of payment as fishy and potentially an attempt to evade taxes. You are explicitly seeking to do that when you acknowledge that you are paying them more than the work they do is worth so that they can put the money into a tax deferred vehicle that you otherwise wouldn't have access to.
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Re: Hiring your kids

Post by avalpert »

freddie wrote:
Gropes & Ray wrote:It's not fraud as long as the kids actually do work. I just wouldn't pay them above market rate. At 8/hr, they would make $6000 in 750 hours. That's probably more than a 12 should be working, but even funding half of the roth could be a huge head start. If you live near a city with an inflated minimum wage, you may be able to pay them more.

Take a look at child labor laws. Family businesses are often an exception, but you may need permission of their school guidance counselor in order to employ children under 14.
You also need to enroll the kid in the companies ROTH 401(k). I think you can make 6k, contribute to the ROTH and then have dad give the kid 5 of for the ROTH IRA.:).
But only if you would do this for all your part time employees...
Boglegrappler
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Re: Hiring your kids

Post by Boglegrappler »

This stuff is done all the time, and it is legal to do it as long as you don't violate certain rules. A lot of local businesses that advertise use their own kids as models in the ads. And you can see on TV certain ads use athletes parents (usually moms), which is a way to get some income to the person without paying the "matching" gift tax.

If I were a business owner, I'd familiarize myself with all the rules about this.
Spirit Rider
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Re: Hiring your kids

Post by Spirit Rider »

First you need to determine if your kids would be subject to federal and state child labor laws. Generally, children working for parents are not subject to Federal laws providing they are not working in hazardous conditions or certain employer types or occupations. Many, but not all states will exempt children working for their parents in approved employer/occupations at any age. You really need to check what the Federal/State application/exemptions would be.

As has been said, you need to pay them a fair market value (FMV). Generally, this means you couldn't pay them more than other general help. The exception to this might be if you employed them in something they had a specific skill. For example, I have one friend who employed his son as the IT support person from when he was 14. He was more knowledgeable than many in the profession.

Finally, if you are a sole proprietor and not a corporation, your children as employees are not subject to FICA < 18, and are not subject to FUTA < 21.
ralph124cf
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Re: Hiring your kids

Post by ralph124cf »

Are your children employed in your Subchapter S Corporation or LLC subject to FICA, or does that only apply to C corporations?

Ralph
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TomatoTomahto
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Re: Hiring your kids

Post by TomatoTomahto »

I personally don't believe in 12-year olds working enough to earn $6k per year, but I guess you're never too young to find out what a no-show job is [/sarcasm]
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YttriumNitrate
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Re: Hiring your kids

Post by YttriumNitrate »

Even if Southwest_Stacker's kids decide to blow their money on video games (or whatever 12 year olds are buying these days), Southwest_Stacker could still give his kids $5500 in brokerage accounts he set up for them.
Last edited by YttriumNitrate on Mon Jun 08, 2015 7:42 pm, edited 1 time in total.
TFinator
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Re: Hiring your kids

Post by TFinator »

It depends on the kids and the company, but I work in a company with <10 employees and if my boss hired his kids it would be annoying. Partially because having kids around would be annoying. Partially because money taken out of the company to pay the kids would be money otherwise used to make my life better.
If they aren't really adding value, I would be angry that 5 figures of cash is going to the kids where it could be spent on other things to make the company more successful or quality of life improvements in the office and otherwise.

Only you can make the call - but just something to consider.
Spirit Rider
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Re: Hiring your kids

Post by Spirit Rider »

ralph124cf wrote:Are your children employed in your Subchapter S Corporation or LLC subject to FICA, or does that only apply to C corporations?

Ralph
I believe the exception to FICA/FUTA contributions is only available in a sole proprietorship, an LLC operating as a "disregarded entity", or a spouse/spouse partnership. Any corporation whether an LLC with S-Corp election, a S-Corp, or a C-Corp would not qualify.

In other words, you actually have to be working for your "parents" and not some entity.
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Re: Hiring your kids

Post by LadyGeek »

This thread is now in the Personal Finance (Not Investing) forum (tax law).
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Re: Hiring your kids

Post by flyingbison »

YttriumNitrate wrote:
flyingbison wrote:If you hired them, and they worked enough to earn 6K, how do you know they would want to put their money into a Roth?
Even if Southwest_Stacker's kids decide to blow their money on video games (or whatever 12 year olds are buying these days), Southwest_Stacker could still give his kids $5500 in brokerage accounts he set up for them. Perhaps someone can verify this, but I do not believe the money you contribute to the Roth has to come from your earned income. The limit on the amount you can contribute is your earned income, but you can contribute up to your earned income limit with unearned income.
Sure, but then he's paying out over $11K for a fake job, instead of 6K. Would make much more sense to just invest in a taxable account for them.
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Re: Hiring your kids

Post by LadyGeek »

southwest_stacker wrote:
bertie wooster wrote:
southwest_stacker wrote:I am not sure about the laws on hiring them and also paying them way above what the work they are doing is worth.
Since the whole point of this endeavor is to pay your children to do essentially nothing I would avoid this as it is blatant fraud.
I am not going to pay them to do nothing. We have 5 company vehicles, and about a dozen pieces of machinery. I can envision them washing these and cleaning the interiors on almost a weekly basis. There is lots of paperwork that needs to be organized and scanned in on a regular basis. They will definitely be working but I can't say that they will do $500 worth of work every month.

I certainly don't want to do anything illegal but at the same time I want to take advantage of every thing I can within the law.
The OP wishes to understand how to comply with the law. Let's proceed along those lines.
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Re: Hiring your kids

Post by 3CT_Paddler »

Hiring your kids is a great idea. But I would actually use it to teach a valuable lesson... not avoid taxes.

If your kids don't understand the value of a dollar, and you hand them a Roth IRA worth say $60k post college, what do you think will happen when they realize they can withdraw all contributions without penalty? There is at least a 50-50 chance the child will blow it on a nice car or something else foolish.

When I was 13, I started working summers at my father's shop at below mimum wage ($3/hr not THAT long ago). By the time my brother and I were 18, we were making good money and had some valuable skills, but most importantly... we learned money does not grow on trees. Even The Man has bills to pay, and if you are costing the company more than the value you bring in the form of production, sales or expertise... why should they continue to employ you? We never lived off the bank of mom and dad post college, and I am thankful for those lessons.

I say pay them a fair (or less than fair) wage, and let them do real actual work. Watch them take pride and responsibility for a job well done, and model good habits!
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Re: Hiring your kids

Post by mikep »

Look into requirements for workers comp insurance. It can be required in some states even if the only employees are family members. My wife runs a business and I help out, but all the red tape of workers comp insurance is a thorn in the section 105 medical plan I'm thinking about. We have an HSA, so we wouldn't get much use out of the 105 anyway. Its also required even if the only employees are your kids. Minimum premium probably applies which can be $500/yr or more.
Gropes & Ray
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Re: Hiring your kids

Post by Gropes & Ray »

If family members are exempt from FICA, FUTA, workman's comp or any other expenses of employing someone, could that be used to justify paying a slightly above-market wage? Sharing the savings with your employee?
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Re: Hiring your kids

Post by Professor Emeritus »

southwest_stacker wrote:I get what you are saying but that does bring up an interesting point. Can the government really dictate what you can pay someone? As long as you are paying all the payroll taxes and the person is issued a W2 it seems you should be able to pay them what you want.
You can pay them what you like. You get into trouble deducting it as a business expense.
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corner559
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Re: Hiring your kids

Post by corner559 »

My father used to run a large corporation, and he had a strict policy of not employing family. He felt that each of us should make it on our own. At the time, I felt that wasn't fair. But in hindsight, I'm glad he did it.
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