Small Business Owners: Is Your Next Great Employee Living under Your Roof?

In fact, I grew up on a family farm and ranch in Nebraska, and as early as age five, my sisters and I were doing simple chores like sweeping out sheds or feeding animals. I was even driving farm equipment to assist in some farming operations. As I grew older and more capable, I eventually “graduated” to operating heavier equipment and doing more complex and vital jobs on the farm. For many kids like me, such experiences might eventually lead to taking over ownership and management of the business. Though family agricultural operations are less prevalent now, there are still places where daughters and sons work alongside their parents with the expectation that they will one day carry on the family operation.

Another place where this tradition lives on is in small businesses. Retail, manufacturing, and other industries are populated with businesses started one, two, or more generations ago and still owned and operated by descendants of the founders. In our industrialized, mechanized, and computerized society, the circumstances are different than they were in America’s agricultural past, but there are still advantages for small, family-owned businesses to employ the younger generation as an active part of the company. Let’s take a look at some of the reasons why it can make lots of sense for small business owners to hire their children.

Tax benefits. Wages paid to a child are deductible business expenses.^[1] They are subject to income tax withholding, regardless of the child’s age, but for younger workers with less responsibility, business owners may wish to maintain the annual wage at or below the amount of the standard deduction ($13,850 in 2023), taking into consideration any other sources of taxable income the child may have (dividends, interest earned, etc.). For sole proprietorships, partnerships, and limited liability companies solely owned by the child’s parents, it’s definitely worth noting that such wages are not subject to Medicare or Social Security taxes if the child is under 18; above that age, these taxes should also be withheld. For employed children under age 21, unemployment taxes (FUTA) do not apply. If your business is organized as a corporation, all withholding requirements apply, but their wages are still a deductible expense for the company.^[2]

Home-grown talent. It’s no secret that the labor market remains tighter than it has been in years, from employers’ perspectives. Almost half of all US workers are employed by small businesses.^[3] But according to a June survey by the National Federation of Independent Businesses, 42% of employers reported vacant positions they could not fill.^[4] Especially for seasonal or part-time positions, your child may be the perfect fit for your need. A full-time position could also be considered, as long as the child is 16 or older, taking into consideration applicable labor laws (which will be discussed in more detail below).

Another major plus for bringing your child into the business includes succession planning. Many owners of family businesses are building their enterprises for the very purpose of providing financial security for their children and, perhaps, their grandchildren. If your child has the ability, the aptitude, and the interest to get involved in the day-to-day operation of the enterprise, why wouldn’t you want to take advantage of that? According to a 2018 survey of family businesses, 43% of family enterprises have no succession plan in place, yet 70% would like to transition their businesses to the next generation.^[5] By bringing a child into the business, owners can start laying the important groundwork well ahead of time.

Teaching the “savings habit.” Even if your child doesn’t really need the current income, their work can translate into valuable lessons in providing for the future. As long as they have earned income, they can fund (or you can fund on their behalf) a traditional or Roth IRA. Contributions of up to $6,500 (or 100% of earned income, whichever is less) can be made for 2023. If a Roth account is chosen, funds can also be withdrawn on a tax-free basis for qualified educational expenses, making it a good option for future education funding. Even if your child decides to spend some of the current income, you still have the option of funding their IRA, up to the limits mentioned above—think of it as a “matching contribution.” When they see how growth and compounding can work for them over the years, chances are your child will become a regular, disciplined saver, which is perhaps the most important attribute required for building wealth over a lifetime.

Follow the rules. Labor and tax laws govern requirements around age, hours worked, and type of duties performed by children in the workplace. Though parents who employ their children are exempted from many of the requirements of the Fair Labor Standards Act, certain restrictions must still be observed. Perhaps most important, children may not be employed in any hazardous work, such as mining, heavy manufacturing, work involving exposure to radiation, and the like (agricultural work is generally allowed).^[6] Parents should also be aware of local or state laws concerning child labor that may be more restrictive than federal law.^[7] Wages paid for work by a child must be considered “reasonable” for the work performed, and the child must be of such age as to be “reasonably” capable of performing the assigned tasks (i.e., you probably can’t get away with having your four-year-old serve as a receptionist—as cute as that would no doubt be). Such tasks might include filing, sweeping out a warehouse or doing other housekeeping tasks, helping with inventory, certain types of data entry, and other similar, typically non-hazardous tasks. For children of small business owners, there are generally no limitations to hours worked (though again, state and local laws may impose additional requirements—school truancy statutes, for example—that must be considered).

At Modera Wealth Management, we are dedicated to helping small business owners make smart financial decisions, informed by the latest research. To learn more, visit our website and explore how we help entrepreneurs lower their taxes, provide for succession planning, and more.

Buen camino!