Consultant’s Corner: Hiring Your Children
Q: Can I hire my children to work for my corporation?
Corporations (C and S types) can generally hire the children and other family members of the corporation’s shareholders to work in the business provided that they comply with applicable state and federal employment/labor law. For example, child labor laws generally apply to business owners’ minor children (children under the age of 18) unless an exemption applies. And the work permit, hours of work, school attendance, and other child labor laws vary based on age and other factors.
Certain employment tax benefits are available to business owners who hire their minor children and other family members to work in their businesses; however, those employment tax benefits are not available when the business is structured as a corporation (C or S type) or an LLC taxed as a corporation (C or S type).
When the corporation’s shareholders have their children work in the business, they will be classified as W-2 employees unless a statutory exception applies. With their children classified as W-2 employees, the corporation will pay them W-2 wages for the services they render to the business and need to comply with federal and state employment (payroll and unemployment) tax requirements with respect to those wage payments. The W-2 wages paid to their children for the services they render to the business are deductible on the Salaries and Wages of the corporation’s income tax return as a business expense like the salaries and wages paid to other unrelated employees.
In terms of compensating or paying minor children, while there are no maximum amounts by law that business owners can pay their minor children who work in their businesses, they should pay them W-2 wages that are reasonable and commensurate with the work they have their children perform for their businesses. Reasonable means that the rate of pay is appropriate for the nature of the work and the qualification of the worker and you can document that the work was actually performed. For example, it wouldn’t be reasonable to pay a minor child $20 per hour to perform tasks for which you would ordinarily pay an unrelated employee minimum wage.
Most states have child labor laws that will be considerations when business owners hire their children, as well as other minor children, to work in their businesses. You can research your state’s child labor laws typically through the Department of Labor website.