Nepotism—the practice of using power or influence to favor relatives—has a poor connotation. However, when it comes to your business, it may just be a great idea, especially in today’s environment. Here are 5 reasons why.
1. Talent in a tight job market
With unemployment rates at record lows, many businesses are now struggling to find the employees they need in order to grow. NFIB reported that 31% of owners had jobs they couldn’t fill. If you find yourself in this position, think about whether your child can fill an opening in your company. Depending on your child’s age and talents, the spot may be part-time, seasonal, or full-time.
If your child is young, be sure to check on state child labor laws. These laws set the minimum ages, maximum hours, coordination with school, and a ban on hazardous work. Under federal law, children younger than 16 years of age working in nonagricultural employment in a business solely owned by their parents, may work any time of day and for any number of hours. So, your 14-year old can do data entry in your home-based business. However, parents are prohibited from employing their child in manufacturing, mining, or in any other hazardous activity. You can see an overview of child labor laws at the U.S. Department of Labor.
2. Experience
Putting your child to work in your company gives him or her helpful experience in the business world. This resume-type work can help your child seek employment elsewhere after graduation if this is what they want.
If the job you need to fill requires training, why not train your own child to do it?
3. Tax-free income
Earnings up to the amount of the standard deduction for your child’s filing status (typically single) are tax free. For 2018, this means that there is no federal income tax on earnings up to $12, 000. And your business gets to deduct the wages, which must be reasonable for the work performed. Overall, this means more money within the family.
And there may be payroll tax savings for the business as well. If your business is unincorporated (a sole proprietorship, partnership, or limited liability company):
- Payments for the services of your child under age 18 are exempt from FICA taxes
- Payments for the services of your child under age 21 are exempt from FUTA taxes
Wages are still subject to income tax withholding unless the child claims exemption from it. The IRS has not yet announced the rules for claiming exemption from income tax withholding for 2018, but says it’s working on a revised Form W-4, which is the form used for claiming an exemption.
4. Retirement savings
No matter how young your child is, it’s not too early to begin saving for retirement. As long as a child has earned income—such as wages from working for you—a contribution can be made to an IRA; there is no minimum age requirement. For 2018, the contribution limit is $5, 500, but no more than 100% of earned income. Thus if your child earns $4, 000, the contribution limit is $4, 000.
Given the long time before retirement, it may be better for your child to forego a tax deduction in a traditional IRA in favor of creating tax-free income through a Roth IRA. And, even if your child spends some or all of his or her earnings, you can make the contribution on the child’s behalf (up to the earnings limit).
5. Succession planning
According to a survey a few years ago, 29% of business owners expected to exit within 5 years, and 54% within 10 years. That same survey found that 37% of business owners wanted to transfer the business to a family member. If you’re contemplating retirement any time soon, or just want to be prepared to keep the business within the family in the future, then grooming the next generation now to take over down the road is a wise decision (assuming that there’s an interest on their part). Hiring your child now is the first step down this road.
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