Questions about hiring your children comes up quite a bit from business I have worked with. There are some advantages and some disadvantages, so let’s look at some situations. Let’s run through some details to be considering when you're hiring your own children. It is very common in lawn care to involve the family.
First of all, you really want to consult all the state labor laws, minimum age and work hour regulations, consult federal and state laws. Even though they are your kids, you have to follow the minimum age and hours your children are allowed to work industry specific restrictions. Certain industries like manufacturing, lawn care (agriculture) and hazardous jobs have additional restrictions you have to follow. I've worked at plant nurseries for many years, and those are considered agriculture.
When hiring your children, pay special attention to laws about using machines with motors like we do in lawn care business. Make sure you're protecting your children ensuring safety and legal compliance. Know the labor laws so that you don't have any legal issues. Consult a professional HR person or a professional advisor in your area. If you have workman’s compensation, they will have a lot of the information you will need.
Check on OSHA Regulations
While OSHA doesn't have specific regulations for minors, federal child labor laws limit the types of work and hours that minors can perform:
- Age 14 and 15: These minors can work in nonagricultural jobs, but there are restrictions on the times of day and number of hours they can work. For example, they can't work more than 3 hours on a school day, and no more than 8 hours on a non-school day. They also can't work with power-driven mowers, cutters, or trimmers.
- Age 16 and 17: These minors can use mowers with less than 20 PTO, including riding mowers and string weed eaters, if the safety features are intact. However, they can't use chippers.
- Under 18: Minors under 18 can't work in hazardous occupations
In some states, you don't have to have workman's comp. Some you do. Some, like Texas, you do if you have more than 5 employees. Whatever your situation is with workman's comp, be sure you check on that. You don't want your child, of course, to get hurt, but you really need to know if that's gonna mess up your workman's comp. Wanted to have a disclaimer in here.
Talk to An Accountant
I am not an accountant. Please see your local accountant to get the details for your location and your situation when you're hiring your kids. As a parent employing a child in a sole proprietorship or partnership, you can avoid FICA taxes, which are the Social Security and Medicare taxes, for children under 18. This exemption can provide significant tax savings. However, this does not apply to corporations. Ensure you understand the IRS rules and guidelines with expert help. We're gonna talk about several things having to do with taxes, but the main thing to know is the differences for sole proprietorship or partnerships.
Exemption does not apply if you have an s corp or a c corp. Exploring tax benefits. Potential tax benefits of hiring your own children, parents can deduct their child's wages from their taxable income under certain conditions.
Let’s say you were going to declare that you made a $200,000 profit in your business and pay taxes on that. Maybe you had a child that you hired during the year, and you paid them $25,000 during that year as a regular employee. So, your profit would actually be a $175,000 because you treated your child just as a regular employee, which is perfectly fine. You are treating them just like anybody else. That can help your taxes because the $25,000 your child earned is going on their taxes not on you.
Your child will get a lot of special breaks themselves, so having the $25,000 show up as their responsibility can work best for everyone. (Even if you have to give them the money for their taxes.) Social Security and Medicare tax exemptions, we mentioned this. It really depends on the type of business that you have. It’s called Income shifting for family tax savings. This is when you are shifting the income to your children in a lower tax bracket that can reduce the overall family taxes.
Their Pay Should Match The Work
There are rules and requirements about providing legitimate work and reasonable pay. This is something you really have to watch and document. The children must actually work like other employees and be paid reasonably for that work. We're going to talk more about that later in this article.
I highly suggest you consider a tax professional for guidance. Setting this up most advantageous is something you're going to want to run by an accountant. Your child is gonna have to pay income tax on income exceeding standard deductions just like anybody else. The standard deduction for dependent child under 18 actually, this is $1150 income above the threshold is taxed.
Your children may need to file a tax return depending on how much money they earned. If they exceeded $1,150 or earned income more than $13,850, they must file a tax return. It's going to be really important that you keep records of your child's income and their deductible expenses so they can calculate their taxable income, and determine filing requirements. Your children are also going to have deductions because they will need boots jackets and assorted things that other workers also buy and take off their taxes. Your child may also have additional expenses to deduct.
Hiring Your Children - Understanding the FICA exceptions
Let’s do an overview of FICA taxes. We mentioned that taxes may or may not need to be withheld. The children under 18 who work for their parents may be exempt if it's a sole proprietorship or a partnership.
Structuring payroll effectively for tax savings, you're going to want to make sure that you make the right choices. Should you pay them regular payroll as an employee or should you pay them with a 1099 and have them as a contractor. Declaring someone as a 1099 worker has it’s own set of rules. They need their own vehicle and equipment for example, so be sure you know the requirements.
Staying informed about the IRS rules is where talking to an accountant comes in. They're going to be able to tell you all the current laws and the best way to handle having your child set up as your employee. They will consider all angles for everyone.
IRS Compliance – Be Ready.
If the IRS ever does want to talk to you about employing your child and having these tax deductions and tax breaks, it's going to be really important that you show that they were paid a reasonable salary for their job responsibilities. You want to match their salary to the job duties and required qualifications.
If you have non-family employees mowing, weed eating and blowing and you're paying them $19 an hour to do that, then you need to pay your child $17-19 an hour to do that or something in that neighborhood. You can't pay your child $50 an hour to do something you're paying everybody else $20 an hour to do. The IRS knows businesses might take advantage of the system. They know business may take your child’s salary off your taxes and divert it over to your child that may not have to pay taxes. There are things that will get you flagged and in trouble.
They might not be able to spray weeds due to their age or license requirements. So, if they're limited in what they're able to do, then you're going to have to reflect that in their pay. Determine pay on market rates. Potential issues of unrealistic or generous pay rates is what we were just talking about, and maintaining fairness to avoid discontent. You want to keep their pay aligned across similar roles and responsibility just not to cause a lot of other problems with other employees.
I've worked where owners children were brought in and paid an exorbitant rate. That never works out well with other employees if they find out- and they usually do. There's nothing people can really say about it or do anything about it, but it just causes problems when a child is brought in and paid twice as much as people that have been doing the job for years. That just that just makes sense.
You want to try to mitigate the favoritism through protocols, establish evaluations and disciplinary processes for all employees, not to treat them different. If you're doing ride-alongs with employees, then you need to do your child just the same. If you're going out and checking crews, not putting somebody just because they're your child in charge of a crew just the 1st day. You know, just common-sense things that if you stop and think, would that make me mad if I worked there and that was happening? You know, if you keep that in mind, it'll be fine. Treating children on par with other employees, not giving them special treatment. And some of that is gonna happen. It just does.
If you are fair to everyone, and make unbiased decisions making promotions and terminations based on merit and not just because of who they are, you will be fine.
Legitimate employee validation, complying with the IRS regulations.
You will want to make sure you document all of your child's employment records, all their pay stubs. Just the same as you would anyone else, you want to document their time, create a paper trail. If everyone else clocks in, they need to clock in, clock out. Everyone else has a GPS. They need to have a GPS.
You want to be able to prove to the IRS that your child actually worked there and was treated equally. You want to be able to pull out all the records and show that they were there.
Succession planning considerations.
You do want to prepare your children for future leadership, especially if you plan on passing the business down to them.
It's gonna be really important that you take them with you to work. Involve them in the budget, involve them in the equipment, teach them to use all the equipment, maintain all the equipment. Everything that you can do to be able to pass on this business to your children, you want to go ahead and do that. You will want to mentor them and teach them to be a good leader and teach them the protocols of the business.
When issues come up, how those issues are handled, employee issues, decision making on future purchases. This is your chance to show your children how you built this business and where it can go in the future. As easy as it is just to make all the decisions yourself, you want to remember that it is gonna be their business someday, and you don't want them to have to make the decisions that you made and learn the hard way.
Pass on what you've learned and then listen to them about what they want to do in the future. As soon as possible, promote your children based on merit and prepare your family members to move up in the company.
As you get more employees, your children may be the boss over those employees, or they may work right alongside of them. Even if you only have one other employee, just learning the hard work and learning to talk to customers and learning to sell will be a great experience even though they change their minds down the road. Even if someday they say, " I thought I wanted this business, but I don't" They will have learned a tremendous lesson.
In conclusion, I highly suggest talking to an accountant and go over the best way to set things up to have your children work for you. Check with the labor laws do determine what types of work they are legally allowed to do. You may have employees that also want to have their children work for you. Many of these suggestion would also apply to them.
Keep the Golden Rule in mind when bringing in your children to work with current employees so that you don't cause any issues. The work the children perform and their pay should match and be in line with other employees. Keep records of all your childrens work and pay. If you are audited, you will need to show time cards, or apps where they logged their time. You may also need to show logs of the work they did. Encourage your children to learn as much about the business as possible. Wether they decide to take over the business so just wrok for you as they create other careers, you can teach them so much about business and working with other people. Who knows, they may be the future of your business.