Myth Busting: Hiring Your Kids in Your Business Edition

[@M1318R]

Love that you gave examples as to how you were employing your child. Great video keep it up!

[@JamieTrull]

Thank you! Will do!

[@checkedoff]

What about agricultural-related income?

[@JamieTrull]

Great question, it's a bit too long of an answer for me to do here. Can you submit it to my monthly KZbin live show so I can answer it there. jamietrull.com/youtube

[@lindacastellon2049]

Do you have to pay payroll taxes for hiring your child? I plan on hiring my child through my sole proprietorship and still confused on this part.

[@JamieTrull]

Not if they are minors! They are exempt from payroll tax if they are under 18, but you do need to make sure you set them up on payroll correctly or it could still withhold those taxes.

[@curtiseaton-80]

Are the same laws applicable for both a W-2 or 1099?

[@JamieTrull]

This is actually one of the areas where employing them W-2 actually SAVES taxes. If you employ them 1099, they would have to pay the full 15.3% of self-employment tax (starting with the first dollar they made, there are no thresholds). Plus, from a department of labor perspective, its generally tough to justify that a minor child is independent enough to be a 1099 contractor.

[@timothydevries383]

Good clear information. Thank-you.

[@JamieTrull]

You are welcome!

[@agentgringo1996]

What about the Kiddie Tax?

[@JamieTrull]

Gold star question! Kiddie tax only applies to unearned income. Meaning if you make them owners and pay them as owners, you'll have the kiddie tax to worry about. But if they are employees of your business doing actual work, kiddie tax wouldn't apply!

[@zachritchie3770]

since the tax year is almost 3/4 over, can I pay a large lump sum to my child through writing a check to her? or does it need to be a small consistent amount that is run through a payroll service and I would receive the main benefit next year?

[@JamieTrull]

Techncially you CAN do whatever you want, but the key is making sure you have proper documentation in case you are ever audited, including issuing a W-2 at the end of the year to substantiate the amount paid. You'll also want a record of all the time worked and the rates that adds up to the amount you paid them. You could get them set up on payroll this year and pay them officially, even if some of it is back-pay for work already performed (as long as you have the support for that). You'll also need proof of earned income like a W-2 if you want to contribute to a Roth IRA on their behalf.

[@toddletrails1016]

So there are NOT extra hoops to jump through if I am a sole proprietorship LLC? Am I correct in that? How do I make sure I am still considered a sole proprietorship while starting up my LLC?

[@JamieTrull]

Correct that you won't need a Family Management Company. However of course you'll still need to accurately track everything, pay them properly, etc. Setting up an LLC won't trigger becoming an S Corp. You'd have to file an S-Corp election with the IRS to become an S Corp.

[@Swing4TheRing]

But it looks like the IRS says that regardless of age, if you pay them via your LLC, then they are liable for soc sec, medicare, etc. Is this true and should we/could we pay them as "outside labor" rather than issuing them a W2/1099?

[@JamieTrull]

You can hire them through an LLC and be exempt from social security and medicare so long as there are no non-parent owners. However, if you've elected S Corp tax treatment, you don't get that exemption. You can instead set up a Family Management Company - here's a video where I go into it: kzbin.info/www/bejne/qoasYWqtqtlql9Usi=Ir2VSS9nqUBKR4YS

[@JamieTrull]

Also, outside labor essentially is the same thing as 1099. If you pay them that way, they'll be responsible for paying the 15.3% FICA taxes (self-employment taxes) fully themselves, regardless of income. So I don't recommend that approach. W-2 is actually better when it comes to employing your kids, as long as it is set up properly.

[@KristyGreene-p4e]

can your llc give money to your child (tax free) to contribute to the parent's hsa (which obviously they benefite from)

[@JamieTrull]

I probably wouldn't from a paper trail perspective. It could be hard to prove out exactly how much of that benefited the child. I would use it for something that is clearly related to the child just in case you are ever audited.

[@timothydevries383]

The American financial system promotes child labor?

[@JamieTrull]

No, but they promote paying anyone who is working for you a fair wage, including children. There are lots of rules around when and how much and in what industries minors can work.

[@pugiewugie4363]

Hi everyone. I’m no expert but I believe you also save taxes by hiring your kids instead of giving them an allowance. My tax bracket is much higher than hers.

[@JamieTrull]

Yes, so long as you have a business you can do this. My kids are expected to clean up after themselves around the house and don't get paid for it, but they do get paid for the work they do for my business - which is tax deductible for me and tax free for them!