Skip the Allowance and Hire Your Child

Skip the Allowance and Hire Your Child
Eva Rosenberg, EA

It takes about $200,000 to raise a child (not including paying for college), according to the USDA’s annual report. Play with this nifty tool at Bankrate.com to see just how much your child costs.

How can you reduce these staggering costs?

Two ways:

Teach your child the value of money
Skip the allowance and hire her to work in your business

Teach your child about money
TaxMama recently moderated a BlogTalkRadio discussion with Dr. Brad Klontz about H&R Block’s Dollars & Sense program, which provides free tools to help parents, schools, and teens learn about money, budgeting, and financial choices. Suze Orman’s website MoneyMindedMoms.com has an entire section devoted to raising money-minded kids. (Full disclosure: I write for both of these resources.)

Hire your child
Isn’t that a red flag? True, some tax-reduction schemers have faced criminal prosecution for promoting this idea. Why? Because they encouraged customers to put their kids on their business payrolls without having them work for the business. Not only is that a tax crime, but it’s also a really bad example to set for your children.

Hire your child for real. Make it clear how important he can be to the success of your business. Don’t lie. Don’t pretend it’s for his own good. YOU need the help. He can help in a variety of ways, depending on his age and skills.

Here are some ideas: your child can help with bookkeeping, filing, letter writing, billing, web design, blogging, marketing, deliveries, shipping, assembling, cleaning up, inventing, market research, selling, and customer service. Encourage her to take on the tasks she would enjoy the most. She may have talents or interests in areas you had not realized that would benefit your business.

Keep the arrangement businesslike. Use time cards if paying on an hourly basis. Keep metrics when paying for performance (number of subscribers, visitors, or new customers, or on commission). Your child may earn a percentage of revenue, or become a partner, if he comes up with a business product, service, or Website you would not have dreamt up.

Many teens have built businesses or websites that earn millions of dollars. It’s not unreasonable to make a teen a full partner when she knows her own generation well enough to create something like Napster, is it? Plenty of adults have underwritten the costs of a child’s business idea.

What are the tax benefits of hiring your child?

The child’s wages reduce your taxable profits.
If the child is under age 18, his wages are not subject to Social Security and Medicare taxes.
If the child is under age 21, you don’t have to pay federal unemployment taxes, either.
The business can provide fully deductible health insurance and medical benefits.
If a vehicle is needed for the position, the business can provide the vehicle or mileage reimbursements.
The business can provide educational benefits.

If your child works just ten hours a week, for $10 per hour, the wages would be $5,200 per year. Considering FICA/Medicare taxes (15.3 percent), federal (25 percent) and state income taxes (5 percent), you save nearly $2,400 per year. Toss in the other benefits, and you might even double your tax savings. Or you might make health care or college affordable.

Eva Rosenberg, EA is the publisher of TaxMama.com, where your tax questions are answered. Eva is the author of several books and ebooks, including Small Business Taxes Made Easy. Eva teaches a tax pro course at IRSExams.com.