Should I hire my own kids to work for me?

34 Replies

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

I’d pay them cash to do lawn duties as a way to learn about money . Being minors I’m not sure if that is legal or tax deductible to write their work off .id ask your cpa about that before claiming it

You will have to give them a 1099 at the end of the year . They will have to file tax returns and get their own health insurance . 

Just put them to work and pay them .  

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)

@Linda Weygant that's awesome.

I pay mine on a smaller scale than $17500 per year and also avoid FICA and 1099s. They receive k-1 passive income already as members of an LLC that owns 2 apt buildings, but I wanted them to have Roth IRAs. Gotta have actively earned income and file tax returns for that.

Because I have multiple entities, they each earn about $590 per year working for each one.  Funny how it turns out that way.

When I file their taxes, they each end up earning about $1700 HSH (household earnings).  No w-2, no 1099.  Hopefully I'm not too far off with my DIY way to get my boys started in IRAs.  I do keep good records in each entity of legitimate work performed. They are 17 and 13. 

I cam here to say EXACTLY what Linda said!

You are going to pay for your kids supplies/clothing/school ect all year any way....why not let the kids "pay for it" themselves with money that wasn't subject to employment taxes?!?


That's a huge freaking win. Chat with your tax pro about this and get things rolling.

Information above about a 1099 isn't really correct. It's a job, they're not independent contractors, and actually employing them as w-2 employees offers huge potential benefits.

Originally posted by @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)

That’s incredible . You must be some kind of super genius ! Very cool info 

Originally posted by @Steve Vaughan :

@Linda Weygant that's awesome.

I pay mine on a smaller scale than $17500 per year and also avoid FICA and 1099s. They receive k-1 passive income already as members of an LLC that owns 2 apt buildings, but I wanted them to have Roth IRAs. Gotta have actively earned income and file tax returns for that.

Because I have multiple entities, they each earn about $590 per year working for each one.  Funny how it turns out that way.

When I file their taxes, they each end up earning about $1700 HSH (household earnings).  No w-2, no 1099.  Hopefully I'm not too far off with my DIY way to get my boys started in IRAs.  I do keep good records in each entity of legitimate work performed. They are 17 and 13. 

Hi Steve,  

If you're paying your kids as Household Employees, this is not set up to work in quite the same way as the method I outlined above, which is more of a traditional payroll scenario.

If you're filing Schedule H for Household Employees on your return and reporting your kids there, then you're paying the social security and medicare there and then the amount just becomes part of your overall tax bill.

However, you are supposed to give your kids a W-2.  If you just started this strategy, then the IRS may not have caught up with you just yet, but a notice is pending.  If you've been doing this a couple of years, then that notice is likely coming sooner rather than later - they definitely do matching of Schedule H to W-2.

Additionally, expenses associated with Household Employees are generally not set up as business deductions.  So if your kids are working in your business and you are also claiming this expense in your business, it's not technically correct.  Schedule H and Schedule C/E/F really aren't intended to mesh together in quite this way.

That said, in the event of an audit, I don't know that you'd actually owe any additional taxes since everything seems to be getting paid property and the amounts are technically correct.  An auditor may impose penalties for not having everything set up and reported perfectly, but I'm not seeing where you'd actually owe any additional taxes, particularly if you have your business reported on your personal return rather than via a separately reported entity.

It's not the way I would recommend you set it up, but the total tax paid still comes out the same, so may work out in the long run.  I'd just follow up on that W-2 reporting.

Thank you @Linda Weygant .  I only did it last year with one kid.  I have no idea how to do a w-2, but I could do the 1099 route on my own.  Is it difficult to do a w-2 for this scenario?

No, not difficult at all.  

Download a 2017 W2 and take a look at your Schedule H

On your Schedule H - the amount that you are showing on line 1 should go into lines 1, 3 & 5 on the W-2

Line 2 of the W-2 is probably $0

Line 2 of the Schedule H should go on line 4 of the W-2

Line 4 of the Schedule H should go on line 6 of the W-2

If you live in a state that has state income taxes, then line 16 of the W-2 should be the same as lines 1, 3 & 5, but line 17 is probably $0

Fill out as appropriate with names, addresses, EINs and Social Security Numbers.

Then download form W-3 and match the amounts from the W-2 into W-3.

Sign and mail in (the address is on the face of the W-3)

You may have a penalty for late filing, but if you beg ignorance, they'll probably waive it for you.

If you've already filed a 1099 for your kid, you may want to file a corrected 1099 with $0 so none of this is double counted in the system.  The reason why you want to leave this off of a 1099 is that your kids would be required to file a tax return if their 1099 income is more than $400, but are not required to file if their W-2 income is less than $6,350 (this goes up to $12,000 for 2018).

Best of luck!

Originally posted by @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

Good too meet you...

Were you asking as a tax question or a parenting question?

I will take the parenting part of the mix. 

Yes

Heck when I was growing up I was an indentured servant. although I did receive 1.65 per hour and I road my bike to Home Savings and Loan (dating myself) every payday.

Teach them everything from a balance sheet to taking out the trash. How to talk to adults, answer the phone, tedious and mundane work. Do not let them love mundane just show them what it looks and feels like. 

Most importantly teach them that the three words- Hope, Want and Need are wish words and wishing doesn't buy much! However the word REQUIRE equates to SUCCESS which manifests into ACHIEVEMENT and achievement can buy a ton!

11 and 7 year old here. I have from time to time “paid” my kids for assistance. I have moved off of it though.

They will usually find something that they want to buy at some point and I can easily break it down into the tasks and days that I will require them to work to buy it. This has worked a lot better than a wage and it has also demonstrated to them that working at the buildings is part of our family duties.

I don’t “draw a salary “ so in reality everything kicks into the family coffers. When we travel I remind the kids that the buildings have helped pay for it. When we go out to eat, enjoy leisure activities, or pay for travel sports- they know it is partly because of the buildings. They also know that their future education is dependent on the buildings, not that they fully appreciate that.

With my children, the brief time that I offered them an hourly wage resulted in them being clock watchers, overly concerned with the wage and not enjoying the work. I nipped it in the bud.

Some great responses here.

In my youngster days I tagged along while Dad and Mom cleaned, painted, and renovated. It was a drag and a bore but looking back I see I learned a lot from those years.

As a high schooler and in between working summers for their contractor friends, they would sometimes pay me for painting jobs. Then I just felt like a hustler trying to make some cash.

But all of those years together taught me their business model. Use debt sparingly. Pay it off quickly. And do almost all of the work yourself. It has worked really well for them.

My model is different. I'm more leveraged and I've started subbing out many of the jobs that I used to do myself. I don't know if it is better or worse than theirs, but it is steadily working for me. So I would say to find a way to include them in what you are doing because you never know what they will pick up on.

Maybe they will learn that they hate real estate and want no part of it. Win-win, because you just helped them get closer to figuring out what will really make them happy. I like the poster who paid by the job. He avoided the wage/clock watcher problem. I really like the CPA strategies to maximize your deductions and increase your retirement investing - but to me that is just icing on the cake. Do it for what it will teach your kids.

I am tickled this thread sprung to life. So many great thoughts and information. I particularly like the idea of getting a Roth IRA going for the kids. Also all these tax benefits!

Its really heartening to look down and see the kids right there. Growing up on a farm, I was always willing to pitch in. I liked being with dad even though it was rough. Would have missed out on that otherwise. I left out on my own with powerful sinews and enough money and wisdom to make my way in life! 

@Linda Weygant great post! Is there a threshold low enough that you can avoid having to pay social security and medicare? Or can you just hire them as contractors rather than employees?

Originally posted by @Joe Splitrock :

@Linda Weygant great post! Is there a threshold low enough that you can avoid having to pay social security and medicare? Or can you just hire them as contractors rather than employees?

There is no threshhold on the employment.  In exchange for some great personal tax savings, you pay a little Social Security and Medicare.  Don't look a gift horse in the mouth....

The minimum amount that you can earn as a contractor before having to pay Self Employment tax is $400.  At least it was before the latest tax bill.  I haven't specifically seen this change, but to be honest, I haven't gone looking for it.  But I do think it's still $400. 

A speaker at a wealth building conference advised us to set up Roth IRAs for our children early in their lives to take advantage of the longer compounding time until they reach retirement age. 

She wanted to create a flier for a class she would be teaching on the subject (which was a class she charged a fee to attend) and wanted a photograph of a child to go on the flier. She called a local talent agency to find out the going rate for a child model and then hired her 5-year-old son for the job (rather than have the talent agency send someone over to be photographed).

She did everything by the book and ended up funding her son's Roth IRA from his earned income that year.

*DISCLAIMER*  I am not a CPA, please do your own research, however I think some things previously mentioned are slightly incorrect.

First off, you should definitely pay your kids.  Income shifting is a valid technique to reduce your taxable income at a higher tax bracket, by moving that income over to your children who will pay little or no taxes on their income.  This is especially nice since the standard deduction just skyrocketed to 12k, meaning the first 12k of income that the earn will not be subject to taxes.  Realistically this should cover their entire income for the year since even if you pay $10/hr, your kids would have to work almost 25hr/week in order to cap out at 12k which your kids probably aren't going to work anywhere near that many hours.

Also you 'probably' shouldn't have to worry about them paying SS or Medicare taxes either.  Per guidelines from the IRS: "

Payments for the services of a child under age 18 who works for his or her parent in a trade or business are not subject to social security and Medicare taxes if the trade or business is a sole proprietorship or a partnership in which each partner is a parent of the child. Refer to the "Covered services of a child" section below."

https://www.irs.gov/businesses/small-businesses-self-employed/family-help

Since their income likely won't be taxed, it is a perfect candidate to start their Roth account.  They can contribute up to 5500 annually as long as they have at least 5500 in actual earnings.  This money can be accessed early and withdrawn penalty free for education expenses for college assuming the account has been open for at least 5 yrs, or 10k for the purchase of a home, (may still need to pay tax at time of withdrawl).  But if they don't need the money for school then they will have 50+ years for that money to grow tax free and will set them up well for retirement.  Or the money can be used for a 529 plan which is probably better way to strictly fund a college account.

Originally posted by @Patrick M. :

@Linda Weygant that is a interesting info.

But it seems to me that you would be begging to be audited every year.

 Nope - it's not a red flag.  I have clients for decades that have used this scenario.  None have been audited.  It's quite common.  The key is to keep time cards and job descriptions so that, in the event of an audit, you'll pass with flying colors.

It only seems risky now because the limits just went up for 2018 to $12000 standard deduction plus $5500 for the Traditional IRA. In 2017 and prior, the amount you could pay your kids without them having a tax liability was $6300 for deduction + $5500, so it just didn't seem quite so high and, therefore, risky

The key is to be age appropriate with tasks and hourly wages, which is why I talked so much in the beginning about child labor laws, valid hourly rates, etc.

For example, I would not recommend this scenario with children under the age of about 7.  But starting at 8, you can task your child with stuffing envelopes, taking out the office trash, vacuuming floors or even doing door hangers.

At age 12, they could do all of the above plus, perhaps, begin mowing lawns at rental properties, cleaning rentals for turnover, perhaps touch up painting.

At age 16, they can then answer phones, do some computer work, do some more advanced maintenance and repairs, do bank runs, supply shopping, etc.

When my son was about 5 through 9, I paid him $5/hour to stuff envelopes. He really liked using the automatic paper folder I had and begged to do it, so I taught him to run my client invoices through the folder, put it in the envelope so the address was in the window and put the stamp on. He worked about 3 hours per week and I gave him about half of the money for him to spend and I stuck about $300/year in an IRA for him.

So you'll notice that even though I *could have* paid him several thousand per year to meet the IRS tax filing requirements, I kept his compensation reasonable and commensurate with his experience and the work he was doing.

There's a big difference between trying to claim your 7 year old is legitimately earning $17,000 per year and putting your older teenager to work in your office or on your properties year round.  The latter can easily add up to $17,000/year.  An office worker is easily $17/hour while a maintenance position could easily pay $20-$25/hour.  Full time work in the summer and part time during the school year easily adds up.

I am NOT an aggressive CPA.  I am very middle of the road in the aggressive/conservative spectrum.

My parents hired me to work for their real estate business 30 years ago.  I was a brat and I hated it and resisted making any effort, although I was fine working hard on my grandfather's farm.  Now I also have a real estate business and try to hire my kids.  They act like brats and they hate it and act lazy, but they work really hard for other people.  Now my parents see this and laugh and laugh...  Payback.  I deserve it.

Absolutely love the discussions and insights. @Linda Weygant , @Ben Zimmerman   provided some amazing information.
 

I am involving my kids (7 and 12 yrs old) so that they can learn the business and use their earned money for their activities, etc.  I have been employing my kids to help with various chores. My 12 year old helps find and analyze properties for me. (I have given him my set of criteria) .

A couple of questions: 

1. Do I need to have a written employment contract with my kids? If yes, can someone share a sample that I can use.

2. How stringent do I need to be in documenting the work they do? Can I put them on monthly salary of say $300 for the 7 year old and $500 for the 12 year old? 

Originally posted by @Neeraj Bagga :

Absolutely love the discussions and insights. @Linda Weygant , @Ben Zimmerman   provided some amazing information.
 

I am involving my kids (7 and 12 yrs old) so that they can learn the business and use their earned money for their activities, etc.  I have been employing my kids to help with various chores. My 12 year old helps find and analyze properties for me. (I have given him my set of criteria) .

A couple of questions: 

1. Do I need to have a written employment contract with my kids? If yes, can someone share a sample that I can use.

2. How stringent do I need to be in documenting the work they do? Can I put them on monthly salary of say $300 for the 7 year old and $500 for the 12 year old? 

 I don't think you need to be so formal as to have an employment contract, but you should have a written job description for each child.  I would also have them fill out time cards as proof that they did the work.

Thanks @Linda Weygant .  This helps. 

So I can get them to be on a monthly 'salary' instead of an hourly rate?

Below is the Job Description that I put together for the 12 year old. (He already does most of it)

Job Description: 

The job title of the Employee will be: Property Search and Management Assistant. The job duties you will be expected to perform will be the following:

Clean Up:

You will help with keeping the office clean. You will clean the surfaces, empty trash, shred the papers marked for recycle, vacuum the floor.

Work at Rental Property:

When asked you will help with mowing lawns and shoveling snow at rental properties, cleaning rentals for turnover, touch up painting. You will perform these activities under adult supervision.

Assembly and dismantling:

You will help with assembly or dismantling of light furniture and fixtures. You will perform these activities under adult supervision.

Find and analyze properties:

With the property criteria, you will help in finding potential properties. You will use tools like Zillow.com, Realtor.com and Trulia.com. 

Modeling assignment:

Occasionally we may use you as a model for different print and promotional material for the business.