If you own a restaurant, shop, or service business, chances are high that you’ve hired your children to assist you. Your children have likely worked at the cash register or delivered food items with you at some point in time. Eventually, the time comes when every entrepreneur asks themselves whether it’s possible to employ their child officially.
The answer is often yes in most cases. However, there are several aspects to consider from an employment law perspective as well as some tax-related benefits. In addition to the information in this article, you should consult with your accountant, and maybe an attorney, who is familiar with your business model and local regulations.
What the IRS Says About Hiring Your Children
According to the IRS, the general rule is that your children have to perform the actual job with a proper salary. If everything is done correctly, and you operate as a sole proprietorship or partnership where both partners are parents, there can be some real benefits. Specifically, the income of family employees under the age of 18 working for you isn’t subject to Federal Insurance Contributions Act (FICA). Federal Unemployment Tax Act (FUTA) doesn’t apply for children under 21 years old.
Keep in mind that the payment of wages by a family employer is exempted from employment taxes only if the employment isn’t a corporation and one of the partners (a parent) doesn’t operate as an independent contractor. Also, you can deduct wages paid to a child as a regular business expense, so you can lower your taxes due to the lower tax rates applicable to minors.
One thing you should be cautious of is that the IRS is very strict about family employers because of the potential for abuse. Paying a minor for housework is not allowed as well as setting excessively high wages. Therefore, the wage paid to a child must be reasonable for similar work performed by a regular employee.
Minimum Age Restrictions
According to the Fair Labor Standards Act (FLSA), the U.S. Department of Labor states that its minimum age requirements generally don’t apply to children working for their parents with a few exceptions.
- Parents are not allowed to employ their children in dangerous occupations. These regulations apply to any minor under 18 years old regardless of whether it is an immediate relative or not.
- When it comes to other occupations performed by a child under 16, you can allow them to work as many hours you wish.
- Once a minor becomes 18, the child labor laws no longer apply to him/her.
Florida’s Special Requirements
In addition to the rules described above, the state of Florida has child labor law that adds additional restrictions and requirements.
Florida restricts the number of hours a minor can work. The restrictions differ depending on a child’s age and school status and require the employer to verify a child’s age and document it. Additionally, minors aren’t allowed to drive vehicles on the streets in connection with their employment, except for agricultural jobs.
Children working for their parents are not excluded from Florida’s restrictions. The state does allow some exemptions, however, certain requirements have to be met.
Since the rules of the state and federal laws overlap in a complicated way, you should consult with an employment attorney or at least check current requirements in Florida. This due diligence will save you from unnecessary troubles and violations.
How to Set It up Correctly
The most common mistake made by parents is an informal arrangement. You will receive no tax benefits without formalizing your relationship with a minor. Do the following:
- assign your child a specific position with appropriate responsibilities
- set the salary to match the job
- track your child’s work hours using timesheets and/or a payroll time clock system
- complete all necessary paperwork, including a W-4 form and Form I-9 form
- submit Form W-2 for your child every year
- run payroll accurately
A modern POS system can support time clock and payroll functions to eliminate unnecessary complications.
Our company has researched and helped with these kind of scenarios. For instance, we wrote about integrating payroll solutions such as ADP’s Clover Payroll into a POS system and simplifying the task of managing employees.
What It Can Mean for Your Kids
Besides the tax benefits for a business owner, working for their parents can contribute a lot to a child’s personal development. For example, your child will learn what it means to earn money, get used to taxes, and understand what earned income is and what isn’t.
Additionally, the income they earn during employment is eligible to be deposited in a Roth IRA. You can open an account and encourage your child to start saving money.
Finally, your son or daughter will learn how orders are processed, what it takes to deliver goods to customers, and why quality service matters. All these skills can be extremely valuable for your child in the future.
Several Aspects to Keep in Mind
As you know by now, a lot of factors affect how you can arrange employment of your child. First of all, you need to consider the structure of your company. Payroll tax benefits available for sole proprietors and qualifying partnerships cannot be used for S-corporations and LLCs with several members whose partners are not parents.
Secondly, state law can prevent you from employing a child in a certain way. Despite that fact that the FLSA doesn’t have restrictions and allows flexibility, the state does have its own regulations. For instance, it is mandatory to provide certain documentation even though federal law doesn’t require them.
Lastly, you should arrange the whole process properly. It should be an appropriate work-related arrangement. Payment for tasks which your child would complete at home without any financial reward probably won’t be considered legitimate.
Ready to Simplify Payroll for Your Family Business?
If you’re thinking of running payroll for your children and getting certain tax benefits, you can’t afford using a complicated and messy system for managing shifts and conducting payroll. Card Systems provides comprehensive services for establishing a POS system with payroll for Florida restaurants, shops, and service providers. Contact us at (239) 549-5055 to discuss your options.
