Tips for Employing Your Children in Your Business

By Chris Peden

According to the 2010 US Census, Asian Americans combined owned 1.5 million businesses – a figure that is up 40.4% from 2002. Many of these small businesses are also family businesses, and parents have often considered employing their children for a summer or part-time after school to teach them the ropes of running a business. Before you decide to employ your child, here are some things to think about.

Things to Consider

First of all, you will have to pay your child. If you don’t, you could be in violation of child labor laws. And you can’t just pay them a couple of dollars to update your website. The amount you pay your child must be consistent with what you would pay an unrelated person to do the same type of work. Additionally, you would be better served to pay them on a regular schedule rather than one lump sum at Christmas. The IRS might look at this as trying to get a break on your taxes rather than legitimately paying for work performed.

Second of all, the work your child does must be necessary to the operation of the business. The rule to follow is that if it would be something that you would reasonable pay a non-related person to do this task, than you can pay your child to perform it.

Third of all, the work your child does must be suitable for their age and experience. For instance, having your 17-year old aspiring artist draw up a brochure for your business would be acceptable, but asking your kindergartner to do the same thing might be something that the IRS would question.

Lastly, your business will have to deal with social security taxes on your child’s earnings. If you pay your child to work in your business, you have to pay them. But do you owe the government for social security taxes? It depends. If your business is being operated as either 1) A sole proprietorship, or 2) a husband-and-wife partnership, you will be exempt from paying social security taxes to your under-age-18 child. However, if you have another form of business, you will have to pay social security on their wages.

Final Tips

• As with everything in your business, know the rules by which you must abide, including the child labor laws.

• Track of all your transactions, no matter how small or inconsequential they may seem.

• If something doesn’t make sense, or if you have any questions, talk to a tax professional before engaging in any transactions to understand the potential the tax effects. If you have any questions, be sure to find a good accountant who can help you work through all the issues you need to deal with as you run your business.

Chris Peden, CPA, CMA, CFM has over 15 years in the corporate world helping companies meet their regulatory compliance requirements.  He also assists individuals with their taxes, and helps small business owners with organizing and making sense of their finance information.  You can reach him at chrispedencpa@yahoo.com, and see his website at http://cmpfinancialconsulting.homestead.com/.