Rental Property Investor · Dayton, OH · Member since 2015 · 312 posts · 273 votes
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?
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)
Come on lets be honest here. Yes you can do it legally but ...really, these are children, pre teen for crying out loud, not employees. The money is not proportionate to the work performed.
We do it to evade taxes. There I said it, our dirty little secret is out in the open now, cuff me.
My accountant does my taxes and I have never been audited either, thankfully, crossing my fingers.
Time cards, yes I am sure dad is going to do that religiously.
If you are going to hire your children, do it above board. Help them fund a Roth IRA with their earnings. Teach them the value of compounding. Consult a tax CPA to make sure you do everything legally. Be proud when they become wealthier than you someday.
if they are below the legal age minimum to work, i don't think you want anytthing documented....
Check the laws. Children work as actors in Hollywood all the time. Farm kids work on their parents' farm all the time (I did when I was growing up). If you hire a teenager to mow the lawn or baby sit, you need to file paperwork with the IRS and withhold taxes.
This is what I did for mine. They were paid and immediately I opened up a bank account for each child. Show them the statements, number etc. Following year, I opened IRA account from checking account funds. Parents pitched in for school awards in the way of cash deposit. One will be amazed at what law of compound interest means over 20++ years. You teach them the value of money, they learned early on to save and created a retirement account very early on.
This is a great post and Linda’s responses were fantastic! My kids host a week long “kids fun camp” for a few hours a day a couple times each summer. My daughter recruited her brother’s friends and also his help to entertain the kids. They charged $8 per child per day and made over $300 each time which they split. It’s enough to start a fund. On top of that they have a few lemonade stands, my daughter teachers piano, babysits, and they do a little bit for me with the 15 rentals we have (begrudgingly.) It’s about $1,000 each a year TOTAL and so it’s time for them to get serious and save instead of just blowing it at Target. This thread was instrumental in helping me know what to do! Thanks everyone :)