Small business owners who are also parents often look forward to the time when their kids are old enough to learn their trade. Maybe you’re planning to introduce them to the family business through a summer gig, a regular part-time thing while they’re still in school, or a one-time opportunity to help with a big project.
However, the IRS wants you to remember that wages paid to children—whether they are yours, a relative’s, or any minor—need to be done in the right ways. Here’s what to keep in mind when you put kids on the payroll.
Hire children the right way
The IRS closely watches when a parent employs their children and will look for red flags. To avoid problems down the road, make sure your kid is off to a good start:
They should perform actual work. The work performed must be necessary and helpful for your business. This can include washing the company vans to revamping the company website. Creating a new position just for them must be considered in this context.
- Pay them real wages. Do not pay them in services or meals you plan to later deduct as business expenses. Additionally, avoid paying them in cash. Like with all employees, you are better off having a paper trail.
- Make sure wages are reasonable relative to the job. If the going rate for a freelance web designer is $5,000, do not pay your child twice that.
- Know the tax implications. Taxes are different when you hire your children than when you hire other employees. Additionally, there are different rules for different business structures.
Follow all labor, payroll, and employment laws
Have your child complete all the new hire forms, including a W-4 form for withholding income taxes. Make sure you have reviewed the federal and state child labor laws and are following all payroll and employment tax guidelines before your child receives their first paycheck. The IRS has a great video that addresses specific payroll questions about employing family members, including children, here.
Bottom line: When you hire your child, make sure they are qualified, receiving a fair salary, and are following all of the rules and policies you’ve spelled out for the rest of your staff. Follow all payroll, benefit, and tax rules. It can get complex, so if you have any questions, reach out to your tax professional for help.
Happy Independence Day, from my family to yours! I hope you are having a great weekend.