I am not a CPA and don’t do taxes, so talk to your CPA before you follow my example here. If you don’t have a CPA and you have a small business, stop what you’re doing and get one. Now.
O.K. now that that’s out of the way, let’s talk about why you might want to employ your child. I know CPAs that have encouraged clients to employ their kids to clean the office and their spouses to file and run errands. What’s the advantage of this? For one, there are tax savings for the business when paying a family member as an employee. If the family member is under the age of 18 (presumably a child, not a spouse) you don’t have to withhold or pay FICA or medicare, nor do you have to pay FUTA or SUTA. (If you don’t know what those are, make sure your payroll processor does.) If you decide to employ your children, you have to comply with child labor laws and the amount you pay should be reasonable for the work performed. Some people put their kids on the payroll just to make the child’s allowance a tax deductible business expense. I guess that makes good business sense, especially if you’re following the advice of your CPA.
However, I believe there are other, better reasons to hire your son or daughter. My friend, Chris, a terrific CPA, is a huge advocate of Roth IRAs and thinks the earlier someone starts contributing, the better. (We had some family turmoil around this issue a few years ago when I had my 16 year old son set one up and contribute half of his summer earnings to it. He didn’t know it was not just a savings account and got quite upset when he discovered he couldn’t withdraw the money and buy a new amp.) If your child is working for you, then she or he can make a Roth IRA contribution and start building toward the future.
In addition to the pragmatic, financial benefits of employing your child, I believe there are some powerful familial benefits. This is why I have hired my 15 year old. He is learning skills that will be useful to him on the job front. I showed him how to create an Excel spreadsheet the other day and he thought it was great. I’m afraid to even look at his math homework since then — he’s probably done it all in Excel. He’s also learning to reconcile bank statements, address envelopes and write checks. He understands what he’s looking at when he sees a deposit slip, receipt or bill. All things he will have to know in the course of daily life.
The best part is that we are working together. I get to see how his mind works as he learns new things. We get to share a few hours a week that are outside the barrage of homework, cell phones, text messaging, and itunes. He may not consider it quality time, but for me, it’s the highlight of my week.