Financial Benefits of Involving Your Kids in Your Business as a Solopreneur
Being a solopreneur and a parent can be a juggling act. The responsibilities of running a business and raising smart, well-rounded children can often feel overwhelming. However, there is a solution that not only brings significant financial benefits but will teach life-long lessons they won’t learn from a traditional textbook in school: involving your kids in your business. In this article we will explore the financial advantages of hiring your children and the long-term impact it can have on their financial future. By embracing this approach, you can create a win-win situation where your business thrives, and your children gain valuable skills and knowledge, all while reaping the financial rewards of this unique arrangement.
Tax Deductions and Exemptions:
When you hire your child to work for your business, it opens up opportunities for tax savings. The wages you pay them are deductible as a business expense, reducing your taxable income. Additionally, your child may not owe income taxes on the amount earned, up to the standard deduction. It is important to ensure that the wage is fair, can be justified, and proper records of their hours worked are maintained. Be sure to discuss the financial perks with your CPA to ensure you are eligible to maximize these tax planning strategies.
2. Custodial Roth IRA:
One of the most powerful financial benefits of involving your kids in your business is their eligibility to open a custodial Roth IRA. By earning income, they can contribute to this retirement account which offers tax advantages and long-term growth potential. The contributions are made with after-tax dollars, earnings grow tax-deferred, and withdrawals in retirement can be tax-free. Contribution limits are the same for children and adults: the lesser of earned income or the annual maximum contribution limit. This opportunity allows your children to start building their wealth and financial security at an early age providing a massive jump start to their retirement journey.
3. Financial Education and Smart Money Habits:
By involving your kids in your business, you create a platform for teaching them invaluable financial skills and instilling smart money habits. They will have the opportunity to learn about budgeting, saving, investing, and even tax planning strategies. This hands-on experience will equip them with practical knowledge that will serve them well throughout their lives. Moreover, it fosters a mindset of financial responsibility, leadership, self-development, professional work ethic, and entrepreneurship, preparing them for their own future endeavors.
4. Reduced Labor Costs:
Hiring your children as employees can significantly reduce your labor costs as a solopreneur. Unlike hiring external employees, you can pay your children reasonable wages without the additional expenses of benefits, payroll taxes, or workers' compensation insurance. Services must be for a trade or business and be a sole proprietorship or in partnership with a spouse in which each partner is a parent of the child. This cost savings can be reinvested in your business or contribute to your overall financial well-being. If your business is incorporated, your child’s wages will be subject to payroll taxes just like everyone else. Although this is less beneficial for a corporation, your child’s wages are still deductible as a business expense, and your child can still contribute to a custodial retirement account and potentially reduce their tax liability to zero using the standard deduction.
5. Continuity and Succession Planning:
Involving your kids in your business establishes a sense of continuity and potential succession planning. As they grow older and gain experience, they can assume more responsibilities and gradually take on key roles within the business. This continuity ensures the longevity of your business and eliminates the need for costly transitions or selling the business.
6. Legacy Building:
By involving your children in your business, you are creating a lasting legacy. They become part of a shared family endeavor, learning the ins and outs of entrepreneurship and the family business. This experience can ignite their own entrepreneurial spirit and provide a solid foundation for their future success. It also strengthens family bonds and creates a sense of pride in carrying on the business through generations.
Involving your kids in your business as a solopreneur not only brings financial benefits but also fosters a sense of responsibility, instills valuable financial skills, and creates a legacy for future generations. The tax deductions, custodial Roth IRA benefits, reduced labor costs, and continuity of the business are all compelling reasons to consider this approach. By providing your children with practical experience, financial education, and a head start in their wealth-building journey, you are setting them up for long-term financial success. Embrace the opportunity to involve your kids in your business and witness the positive impact it has on both your family and your business.
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Cassandra Smalley, CFA, CFP® is a fee-only financial advisor for women located in St. Petersburg, FL, and works virtually with small business owners, moms, and families across the country.
