Hey there amigos! As some of you may be aware, we are starting a family business and hiring our kids as w2 employees. Why in the world would we do that you ask? Well there are several benefits, both financially and educationally. Here’s a breakdown of the advantages we will be leveraging:
Let's start with the tax benefits. As a small business owner, by hiring your children, you can pay each child you hire up to $13,850 in 2023 (and $14,600 in 2024) without them owing any federal income tax. That's because this amount matches the standard deduction for single filers. The wages you pay your children are a deductible business expenses, reducing your taxable income. As long as the compensation is reasonable for the work performed, it can be a legitimate way to lower your tax liability.
One of the most important benefits is the financial literacy and responsibility children will gain with hands-on experience in running a business, understanding the value of money, and the importance of work ethic. This practical exposure complements the financial literacy education they might receive in school or at home. Kids will learn about income taxes, payroll taxes, and how money flows in a business environment (in due time not right away). This knowledge is invaluable as they grow older and manage their own finances.
As a W2 employee with earned income, your kids can now open a Roth IRA retirement account and start taking advantage of compounding interest. Your children can contribute to a Roth IRA based on their earned income from the family business. Since their income is likely to be low, they may be in a low tax bracket, making Roth contributions especially advantageous. Over time, this early start can significantly benefit their retirement savings through compound interest. Check this out. If you pay your child $13,850 in 2023, they wouldnt pay any taxes because that's standard deduction for single filers. So your child would pay no federal taxes on that income, they could then max out their Roth Ira and the earnings on that money would also be tax free. By setting up your child with a Roth IRA you will be setting them up for success and who knows maybe even early retirement.
There is also a lot of skill building that can be done by working in a family business. Your children will develop various skills, such as communication, problem-solving, and teamwork. These skills are transferable to any future career. This will also lead to an entrepreneurial Mindset in which they will be exposed to the challenges and rewards of running a business which can foster an entrepreneurial spirit in your children, encouraging them to think creatively and take initiative in their endeavors.
Dont get me started on the family bonding that's going to be taking place because boy will there be bonding. Working together can strengthen family bonds, as it encourages collaboration, communication, and mutual support. It also creates shared goals and a sense of collective achievement. Running a family business can reinforce shared values and instill a strong work ethic, responsibility, and a sense of pride in contributing to the family’s success.
Now, as the business owner, you can create a work environment tailored to your family’s needs, allowing for flexibility in work hours, location, and responsibilities. You can align the tasks and responsibilities assigned to your children with their interests and strengths, helping them grow in areas where they are passionate.
The goal with our family business is for it to evolve as my kids grow. What do i mean by that? Well, right now they setting up to sell stickers, necklaces, and bracelets. As they grow older and explore their interest they will probably want to incorae them int0o the business and that is going to be awesome! Who knows they might even change the business model. Involving your children in the business from an early age can prepare them to take over the business or start their own in the future. And will prove an invaluable experience.
Remember when you hire your kids it must be legitimate employment which means hiring your children as W-2 employees ensuring that you comply with labor laws and tax regulations. This provides legal protection and avoids potential issues with the IRS. Treating your children as formal employees, with proper documentation and adherence to employment laws, teaches them the importance of professionalism and workplace standards.
By combining these benefits, starting a family business and hiring your children can be a powerful tool for building wealth, educating your kids, and fostering strong family relationships. In the next blog post I will go over the process of starting your own family business so stay tuned.
I would to hear your thoughts, please share in comments at the very bottom of page!
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