How to Hire Your Children In Your Business

When you hire your children in your business, you need to make it a legitimate business activity. Otherwise, the IRS may disallow you the deduction and the other tax benefits of hiring your kids.

Here are some tips to treating your kids like true employees:

1. Pay your children with a check. They can endorse it back to you to get cash if necessary.

2. Make your children punch a clock or keep a time-sheet. Keep track of the activities they do in your business as well as the time spent on each activity.

3. You will need to provide your kids with a W-2 at the end of the year. You'll also need to file quarterly payroll reports even though no tax will be due.

For forms, and detailed instructions on how to hire your children in your business (and how to keep the IRS off your back), please see "How to Hire Your Kids in Your Business: A Step by Step Guide".

Hiring your children is a great tax planning strategy, but it's more than just a tax deduction. Here are a few ways you can save taxes by hiring your children in your small business:

1. You get a tax deduction for the wages you pay your kids, which reduces your taxable income

2. You shift income from your higher tax bracket to your child(ren)'s lower tax bracket.

3. You reduce your self employment income, thus you also reduce your self employment tax

4. Your kids may not owe any tax on the amount you pay them, depending on how much they earn and whether you claim them as a dependent or not

5. Paying your children a wage allows them to open an IRA or Roth IRA, which gives them a jump start on saving for retirement, college and other goals

Need more reasons to hire your kids in your small business? Check out "How to Hire Your Kids in Your Business: A Step by Step Guide".

What better workers than your children to help out with the family business?!? The question however is whether or not you have to report the wages you pay your children.

The answer is yes, if related to your business. In this case, your children are considered common law employees and a W-2 needs to be filed for each child that you have paid to work for your business.

However, if your child earns less than the standard deduction ($5,450 in 2008), the he or she won't owe any taxes on that income.

Also, you get a tax deduction for the amount you pay your child(ren), which reduces your taxable income.

As you can see, this strategy is a win/win for both you and your children!

By Andrew Brown

Some business owners hire family and friends out of necessity while others do it for tax or other advantages. Regardless of the reason, employing a family member or friend has advantages and disadvantages. If you are thinking about hiring people close to you, it is important to understand the pros and cons so that you can establish the right management processes.

Hiring friends or family members can be a positive experience, but on the other hand issues might to arise when an employee tries to take advantage of a friend/family connection. For example, a friend/employee might get in the habit of leaving early several times a month, or a family member might think it's okay to call in absent on a regular basis.

One of the most difficult situations is when you have to discipline or even terminate a family member or friend. Even though the move makes business sense, you could incur a lot of bad feeling from family members or friends who may not understand the situation and think you acted unfairly. This can put a lot of extra stress on the personal and professional sides of your life, which in turn can adversely impact your ability to grow the business.

Employees who are family members also come under the scrutiny of the IRS, which is fully aware of the tax advantages of hiring spouses, parents, and children into a company. If you cannot show that these staff members really did work in the company to earn a wage, and that you applied human resource policies equally across the board, you can end up in hot water with your friendly tax man.

If you need or want to hire family or friends, be sure to adhere to good business practices, like these:

1) Create clear job descriptions for each employee.

2) Have all employees fill out and submit time cards on a regular basis (weekly, biweekly, or monthly).

3) Establish specific hours for all workers, including part time help.

4) Write out all employee benefit policies, including items like paid holidays, health insurance, retirement plans, and company-sponsored programs, and keep these policies in your files.

In terms of your management style, treat family and friends the same way you treat other employees; that is, don't reward them or penalize them because of you off-hours relationship. Hold these employees to the same standards as everyone else in terms of dress, behavior, and quality of work. And just as any employee should relate to you as the boss, these particular employees need to defer to you regardless of your personal relationship. Keep non-business conversation for non-business venues.

Hiring family members or friends is not for everyone. It is a challenge to make rules for your business and then enforce them in a firm but fair manner. If you are going to hire someone that you know, you owe it to them and to yourself to be up front about expectations. If you have any questions at all, listen to your gut and do not be swayed into making a mistake. Helping someone out or pursuing tax advantage is a good thing, but if roles are not clearly defined, you are asking for trouble. Set performance parameters, stick with them for every employee, and maintain professional decorum in your on-the-job relationships. Write down policies and keep the right records. That way, you can prove valid employment to any interested party, and if the situation does not work out, you have legal grounds for dismissal.

Andrew Brown and Small Business Guru provide Coaching, Inspiration and Practical Advice for Small Business Owners and Entrepreneurs. Subscribe to the free, weekly newsletter at http://www.small-business-guru.com