After you and your child agree that they’ll become your favorite employee, they’ll be eager to start earning paychecks.
In this post, I’ll guide you through the steps you should take to pay your child as an employee of your business. And I’ll even provide you with a free Roth IRA calculator to help you determine how much your child could save for their retirement (it will blow your mind!).
Before continuing with this article, you may want to go back and read my first two posts in this series:
- Should I Hire My Child to Work for My Business?
- Hiring Your Child: A Step-by-Step Guide
Step #1: Document Your Kid’s Work
As we discussed in my last post, either you or your child should clearly document what jobs they performed, when they were performed, and for how long. You can do this electronically or on a piece of paper, but just make sure that you keep the document safe for at least 3 years in case the IRS asks for it during an audit.
Make sure you use detailed descriptions on this document or spreadsheet so it’s clear what job(s) your child performed. If you are ever audited or if your labor practices are ever questioned by a government agency, this documentation can serve as proof that you’re following the letter of the law in several areas:
- Proof that you aren’t asking a child to perform hazardous jobs.
- Proof that they are actually working for your business (and not just doing chores around your house).
- Proof that you aren’t violating any laws about when and for how long a minor can work.
- Proof that you are paying your child a reasonable wage for the job they’ve performed.
Below is a simple example of a work log that you can modify to meet your needs. I’ve also created a spreadsheet that you can use if that’s more your style.
| Document Your Kid’s Work | |||||||
|---|---|---|---|---|---|---|---|
| Date | Time In | Time Out | Job Preformed | Hourly Rate | Amount Earned Per Entry | Total Amount Earned | Amount & Date Paid |
| 10/12/24 | 3:30pm | 4:00pm | Organized paperwork and responded to emails | $16 | $8 | $8 | |
| 10/12/24 | 4:00pm | 5:00pm | Took pictures and video of products to share on social media | $20 | $20 | $28 | |
| 10/15/24 | 4:00pm | 6:00pm | Cleaned and set up office space for business meeting | $16 | $32 | $60 | $60 10/16/24 |
Step #2: Pay Your Kid
You should have already outlined a pay schedule in your employment contract, so when it’s payday, make sure you pay up! If you have one, use your payroll service or payroll software to pay your child. If you don’t, make sure you pay electronically or with a check so that you have documentation that you’ve paid. In other words: Don’t pay your child with cash!
Step #3: Give Your Kid a W-2
You will issue your child a W-2 just like you would any other regular employee. Of course, if you have a payroll service, they will do this for you. If not, you can e-file a W-2 yourself through the Social Security Administration’s website for employers.
You’ll also report your child’s wages as an expense on your business’ tax return.
Bonus Step!: Open a Roth IRA and/or a College Savings Account for Your Kid
Naturally, once your child starts collecting a paycheck, the next question becomes what to do with their money. Although it may not be what they want to do with their money, what your child should do with at least some of it is put it into a Roth IRA and let it grow tax-free.
Now that they have earned income, your child can have a Roth IRA, and I highly recommend that you encourage them to open one immediately. You can use this opportunity to help them understand the importance of saving for the future and to teach them about investments.
Then, make sure they (or your business or both) contribute the maximum allowable limit each year. Children can contribute up to the maximum annual Roth IRA amount allowed by the government ($7,000 in 2024), or the total of their earned income for the year, whichever is less.
The amount that a child can save through a Roth IRA account is almost unbelievable! To help you really see how the amount they contribute now can affect the amount they’ll have when they get to retirement age, use my Roth IRA tool.
One note here is that your child can only contribute to a Roth IRA if they are paid as a W-2 employee and not an independent contractor. If you’ve followed the steps laid out in my previous post, then you’re good.
Additionally, if you’re looking to help your child save for their education, a Roth IRA can be used for that. However, even though there aren’t penalties right now for withdrawing Roth IRA money to use for qualified educational expenses, your child will have to pay capital gains tax on any money earned when they withdraw. So if you like the idea of your kids saving for college with their earnings, help them set up and contribute to a 529 plan in addition to a Roth IRA.
Don’t forget that your child can definitely have and benefit from both of these types of accounts, so instead of letting them blow all of their money on the things they desire today, guide them to put their money where it can grow and help them achieve financial independence in the future.
I hope this series of posts has helped you understand that hiring your kid is a win-win-win for you, your business, and your family. As long as you make sure to follow the tax laws and keep proper documentation, you and your child can save big money in taxes while working together to get the job done.
One more thing: If you own an S-Corporation, C-Corporation, or partnership where at least one of the partners is not the child’s parent, then don’t forget that you’ll need to open a family management company to pay your child and retain the tax benefits we’ve been discussing. Everything you need to know is in the last post in this series: How to Hire Your Child to Work for Your Corporation: Creating a Family Management Company.
