If you’re planning to hire your child to work for your S-Corporation, C-Corporation, or partnership where at least one of the partners is not the child’s parent, then this post is for you.
Here you’ll find everything you need to know to hire and pay your child through a family management company (FMC).
Can I hire my child and pay them through my business?
As I’ve discussed in my previous posts in this series, if your business has one of the following business structures, then you can pay your child directly through your business:
- Sole proprietorship
- Spousal partnership where both spouses are the child’s parents or legal guardians
- Limited liability company (LLC) that hasn’t elected to be treated as an S-Corporation
On the other hand, if your business is an S-Corporation, a C-Corporation, or a partnership where at least one partner is not the child’s parent, you can still hire your child and take advantage of the tax savings and other benefits that come with doing so. You’ll just need to go through the extra step of creating a family management company (FMC) to pay your kid.
Why do I need to start a family management company?
Unlike sole proprietorships, partnerships, and LLCs, corporations are required to withhold employment taxes for all employees, including the owner’s child. These taxes include Social Security and Medicare taxes (FICA) and federal unemployment taxes (FUTA).
The easiest way to avoid paying those taxes is by creating a separate company that runs as a sole proprietorship or LLC. That separate company, which is created for the sole purpose of managing the child’s work documentation and facilitating the child’s wages and payments, is called a family management company (FMC).
What is a family management company?
Basically, an FMC is a new business that your corporation uses to hire and pay your child. The FMC you create will send invoices to your business to collect a management fee. That fee is then used to pay the wages owed to your child.
Then, your business will send the payment to the FMC, which will in turn pay your child. This is how you can avoid the FICA and FUTA taxes on your child’s wages. And even though it sounds like some kind of wild manipulation, it’s totally legit!
One thing to keep in mind is that even though they are performing jobs for your business, when using an FMC, your child will officially be an employee of that FMC and not an employee of your business.
Also, because the FMC is providing administrative services like monitoring, invoicing, and tracking work and wages for your child, it can also charge your business a fee for those services if you’d like.
How do I create a family management company?
Luckily, creating an FMC and hiring your child is actually much easier than it might sound! There are really just 4 simple steps for getting started:
-
Register your new FMC as a sole proprietorship (easiest) or LLC with your state.
- If you create a business name, I recommend not using the words “family management company” in the name of your business.
- If asked to classify your business, provide a business activity code, or create a business description, I recommend something similar to “office administrative services” or “business support services.”
-
Apply for an employer identification number (EIN).
- Just like when registering with your state, don’t use “family management company” in your business name, and when asked for an industry descriptor, something in the business administration field will work.
- Set up a business bank account.
- Create work agreements between your business and your FMC and between your FMC and your child (examples of what to include can be found in my post Hiring Your Child: A Step-by-Step Guide).
What steps do I need to take to pay my child through a family management company?
Once you’ve created your FMC, the steps you’ll take to hire and pay your child through the FMC are the same or very similar to the steps I’ve outlined for other business entity types in my post How to Pay Your Child as an Employee of Your Business: A Step-by-Step Guide. I recommend that you read through the detailed steps in that article, but I’ve included an abbreviated and amended list of steps below that are specifically for using an FMC to pay your child.
Step #1: Document Your Kid’s Work
Clearly document the following:
- Type of work performed
- When work was performed (day and time)
Make sure to keep the documentation for at least 3 years. This is your proof to the IRS and anyone investigating child labor that your child was performing jobs that were safe and appropriate for their age during appropriate timeframes. This also shows that your child was performing tasks that actually serve to help the business.
Step #2: Send an Invoice from Your FMC to Your Business
Follow the pay schedule outlined in your work agreements. At the appropriate time, your FMC should invoice your business for the amount owed to your child. Then, your business will pay the FMC the amount owed.
Invoicing is the method I recommend to my clients because it leaves you with a nice paper trail in case it’s ever needed. However, if you’d rather transfer the money directly from your business’ bank account to your FMC’s bank account, you can do that too. Just make sure that you include a transfer note that says, “management fee.”
You should also be sure to record this payment as an expense in your books and on your profits and loss (P&L) sheet as a “management fee” rather than with salary, wages, or payroll.
Step #3: Send Payment to Your Kid from the FMC
To send money from your FMC to your kid, you can simply initiate a direct deposit from the FMC’s bank account to your child’s bank account, or the FMC can write a paper check to your child. You should not have the FMC pay your child in cash because you won’t have a paper trail that way.
Step #3: File Taxes for Both Businesses
When you file your business’ tax return, “management fee” should be listed as an expense. Your business will issue a 1099-NEC that correlates to that expense.
Your FMC will report income and expenses (likely the same amount for both) on a Schedule C attached to your Form 1040.
What other purposes does an FMC serve?
I know that we’ve been talking about tax savings, but an FMC has other benefits too! What an FMC is really doing is allowing you to hire your child so that you can teach them about your business and other work-related skills, provide them with work experience, and educate them about money and finances through their earnings and savings.
Additionally, if you have more than one business or more than one child working for you, an FMC can streamline the business process of hiring your child, paying your child, and monitoring the jobs they perform, especially if they are working for more than one of those businesses.
By the way, if an accountant or the IRS ever questions the “economic substance” or “business purpose” of your FMC, the reasons given here should be more than enough to prove that your FMC wasn’t created for the sole purpose of saving tax money.
I hope this series has provided you with everything you need to hire your child and begin saving on taxes. More importantly, I hope that working with your child in your business, as well as guiding them through the process of earning, working, and saving, will bring you closer together and help them lay the foundation for a smart financial future.
To recap and review, here are the direct links to all of the posts and tools you need to hire your kid:
