Once you’ve decided that it would be a good business and family move to hire your child as your next employee, you’re likely wondering how to get that done.
This post will walk you through every step you should take when hiring your kid to work for your business.
By the way, this is the second post in my series about hiring your child to work for your business. If you’re looking for the reasons why you may want to hire your child, or if you’re still considering whether you should hire them and what they could do for your business, then take a minute to read my first blog post in this series: Should I Hire My Child to Work for My Business?
What steps do I need to take to hire my kid?
The following are the specific steps you can and probably should take when hiring your kid to work for your business. I recommend these steps to my clients to help them navigate tax and legal requirements associated with hiring a child and to alleviate any problems that might pop up down the road.
Just remember that if you have specific questions about how this process will play out for your business, your child, or your taxes, you should consult an accountant experienced in working with small business owners like you.
Step #1: Figure Out Whether You Need to Create a Family Management Company (FMC)
Your business type, or business entity, will determine how you can pay your kid to work for your business. The good news is that no matter which kind of entity you have, you can hire your child and reap the tax benefits we’ve been discussing.
However, if your business is an S-Corporation or C-Corporation, there will be an extra step you need to take to pay your child: create a family management company (FMC). An FMC is a separate sole proprietorship or LLC used to pay your child. It sounds like a big lift, but it’s very doable. For the detailed steps you need to open and use an FMC, read my last post in this series: How to Hire Your Child to Work for Your Corporation: Creating a Family Management Company.
Step #2: Get Your Kid an ID
If your kid doesn’t already have a driver’s license, state ID, or passport, you should go ahead and get them one. You’ll also want to locate their social security card. Having these pieces of identification on the ready will help speed up the paperwork process for hiring, completing tax forms, opening a bank account, opening a Roth IRA, and opening a college savings account for your child.
Step #3: Get Your Kid a Bank Account
This is my favorite step! I still remember setting up my first bank account and how grown up and special it made me feel. Having a bank account for your child will not only fill them with a sense of pride, but it’s also the first step in teaching money management.
As for your business, getting your child their own bank account will help you keep a neat paper trail to prove that your business is paying your kid as an employee.
Luckily, it’s still relatively easy to set up a bank account for a minor. You can just roll into your local bank branch or set up an account online. For minor accounts, they’ll also typically need you (parent or guardian) to sign up as a shared account holder, so you’ll both need to supply the needed ID and social security numbers. They’ll probably request a proof of address, like a utility bill, as well.
Step #4: Fill Out the Usual Paperwork for Your Kid
Your child should complete and submit to you a Form W-4 and a Form I-9 just like you would collect from any other employee. You should also complete any applicable forms or tasks related to your state’s worker’s compensation and unemployment insurance requirements. If you have an onboarding program, they should also go through any applicable parts of that program and you should document that they completed it.
Step #5: Figure Out Your Kid’s Wages
When determining how much to pay your child, you’ll want to do some research into what a reasonable wage would be for the types of job duties you’ll be asking them to perform. You can use the U.S. Bureau of Labor Statistics data, ask others in your field what they pay to have those same jobs done for their businesses, or simply Google it.
An important thing to keep in mind when considering a reasonable wage for your child is that the amount you’ll pay a minor to do a task will likely not be the same rate you would pay an adult or someone with more experience to perform the same task. At the same time, you can’t grossly underpay your child just because you’re looking for cheap labor.
Also, if you’re going to have your child complete different types of jobs for your business, it’s totally fine to pay a different hourly wage for different types of tasks. You’ll want to keep a detailed record (or have your child do this!) of what task was performed, on what date, and for how long (I’ll talk more about this type of record-keeping in a minute).
Additionally, if you are going to assign your child different projects to complete for your business, you can pay them a set amount at the completion of the project rather than paying them an hourly wage. Even if you want them to sometimes complete projects and sometimes perform tasks for an hourly wage, that works too. The key here is to document everything they’ve done and how much they’ve been paid.
Step #6: Figure Out If Your Kid Will Pay Taxes
If all 4 of these statements are true for you, then your child most likely won’t need to file a federal or state tax return and won’t have to pay income or employment taxes:
- Your child is under the age of 18.
- Your child is working part-time for a business that is not owned by anyone other than the child’s parents.
- Your child’s total income for the year is less than the standard deduction.
- Your business is a sole proprietorship, a spousal partnership, or a limited liability company (LLC) that has elected to be treated as a sole proprietorship or spousal partnership.
And, remember if your child doesn’t owe employment taxes, your business won’t have to pay employment taxes on their wages either.
Now, what if your child is 18 or older? Once your child turns 18, they’ll start paying Social Security and Medicare tax (FICA), but they still won’t need to pay federal unemployment tax (FUTA) until they turn 21.
And what if your child earns more than the standard deduction for the year ($14,600 in 2024)? In that case, they will file a tax return and pay income taxes. However, remember that they will most likely be in a much lower tax bracket than you are, so they will pay much less to Uncle Sam than you would if that money were left with your business or paid to a non-child employee.
Since this can get confusing, here’s a chart to help you visualize the taxes owed by age:
| Will Your Kid Have to Pay Taxes? | ||||
|---|---|---|---|---|
| Age | Yearly Income Less than Standard Deduction? | Pay Income Tax? | Pay Social Security and Medicare Tax (FICA)? | Pay Unemployment Tax (FUTA)? |
| Under 18 | Yes | No | No | No |
| Under 18 | No | Yes | No | No |
| 18, 19, 20 | Yes | No | Yes | No |
| 18, 19, 20 | No | Yes | Yes | No |
| 21+ | Yes | No | Yes | Yes |
| 21+ | No | Yes | Yes | Yes |
One other important note here is that if your child has income in addition to what they’re earning from your business, or if you’re not sure whether they should file a federal or state tax return, then you should speak with an accountant who can help you decide.
In rare cases, a minor should go ahead and file a return even if it’s not required. For example, if they have additional income from being self-employed, they may need to file a return. They may also be required to file a state tax return even if a federal return isn’t required.
Step #7: Create a Contract Between Your Business and Your Kid
Now it’s time to get official! I highly recommend that you put a contract in writing that describes the terms of the work relationship between your business and your kid. This will not only help you clearly define your business’ and your kid’s roles and responsibilities, but it will also be a lovely piece of proof to show the IRS in case of an audit.
By the way, this contract is sometimes called an employment contract, employment agreement, job contract, or workplace agreement. But no matter what you call it, you should include the following in your contract:
- Business name and child’s legal name
- Role requirements or job duties to be performed
- Compensation or wages to be paid
- Compensation schedule
- Legal clauses about confidentiality and termination
- Signatures from the business owner (you), the child, and the parent (also you!)
Remember that if you’re paying different wages for different jobs, this should be included in your contract as well.
Step #8: Add Your Kid to Payroll
This one’s easy! Go ahead and add your kid to your company’s payroll system or software. I highly recommend Gusto if you’re looking for a hands-off and reliable company to handle your payroll needs. That’s who I use!
If you need to remember how to set up any applicable tax withholdings, go back to step 5. And remember, your child will be a regular W-2 employee and not a 1099 contractor.
Once you’ve completed these 8 steps, your kid can officially get to work. However, it’s not yet time for you to sit back and relax. There are still some steps you need to understand and follow when preparing to actually pay your child. The good news is, I’ve outlined all of those for you in my next post in this series: How to Pay Your Child as an Employee of Your Business: A Step-by-Step Guide.
