Should I hire my own kids to work for me?

[Gordon Starr]

Hey everyone,

I am a sole proprietor with a steadily expanding buy and hold portfolio. My kids are age 8 (son) and 10 (daughter). As a single dad with sole custody, the kids have always tagged along in some way - sometimes looking over my shoulder at the computer, sometimes riding along to look at property. Up till now they haven't done much actual work, but they are learning a tremendous amount of valuable skills. As everyone grows, the kids would like to make money and I would like to pay them. Thanks in advance if you have any thoughts on this subject. How best should I pay them? How much? What could we do that is legal and right? Has anyone else experience hiring their children?

All the best, Gordon

[Linda Weygant]

Not only can you pay them, but you definitely should.  Here's how it works.

You can pay your children up to $17,500 each, income tax free (Social Security and medicare still apply) - this is assuming that this is the fair market value of what they do and how often they do it.  For example, you can't pay them $100/hour x $175/hour to mow lawns, lick envelopes, etc.  But if they work full time at $8.50/hour, they'll get there (be careful of child labor laws and the issue of them not being able to work full time during the school year, but you get the picture).

But let's get away from child labor laws and assume that your kids can earn $17,500 per year. The new standard deduction is $12,000, so that leaves them with $5500 per year of taxable income. They can then contribute to a Traditional IRA in the amount of $5500, bringing their taxable income to $0.

However, you will have to deduct Social Security and Medicare from their paychecks as well as match the amount, so you'll have an additional $1339 x 2 = $2678 in Soc Sec/Medicare tax expense to pay

BUT, you get to deduct the $17,500 of wages and the $1339 of taxes from your personal return. So in exchange for $2678 of tax, you'll save $18,839 x (your tax bracket) in income taxes. If you're in the 22% tax bracket, that's $4145 in tax savings, your kids get spending money and start saving for their future, you can pop their IRA contribution into a self directed fund and start teaching your kids serious investing, saving and budgeting lessons.

Win/Win/Win (IRS loses, legally and legitimately)

Document what they do and have them fill out time cards so you can substantiate everything.

(Your tax savings may be limited by Passive Activity Loss rules - research accordingly or talk to a CPA)