Episode 25 | 12 Mins
What You Need to Know Before Hiring Your Children
Thinking of hiring your children? Here’s what you need to know FIRST.
(this transcript has been edited to improve readability)
So first of all, quick update.
I know that it’s been a while since I’ve been here. Between tax season and the pandemic, time just got away from me. I looked up and I hadn’t published a podcast episode in like three months. So sorry for ghosting. I didn’t mean it. I’m not the type of person. But while I was away, I took some time and thought about where I wanted to take my business and I did a little bit of refocusing. I’m moving away from tax preparation services, and focusing more on providing tax planning services to small business owners, which was kind of already my target audience in the first place. My overall goal is the same: I want to help small business owners minimize their tax liability so that they can maximize their cash flow. But I believe that with tax planning services, I’d be able to make a greater impact because I would be able to actually help people implement some advanced tax saving strategies in their business so that they can maximize that savings. One of the strategies that goes into that whole tax planning event strategies things is hiring your children and your business – which is what we’re going to be talking about today.
When you hire your kids in your business, the strategy that you’re implementing is called income shifting. I’ll discuss a little bit more about the different kinds of income shifting strategies later on, but I wanted to talk about hiring your kids because I feel like that’s probably the most popular one. Or, rather, that’s the one that most people talk about when they talk about trying to save money in your business by moving the money around to other family members – which basically is what income shifting is, right?
Income shifting is basically transferring money, or wealth or income, between family members so that you can lower the overall tax liability. Wealthy people have been doing this forever. I’m sure you’ve seen the memes on Facebook or Instagram or wherever saying “wealthy people do this all the time, you can do it too”. And it’s true: wealthy people do strategies like this all the time. And not even necessarily wealthy people – just people that know what’s going on and what’s out there, they do these strategies. And it’s available for you too. But as I’ve mentioned in my last episodes about hiring your children in your business, you just gotta do it right. You just don’t take the advice that you see in memes on Facebook, because a lot of that stuff is not necessarily true. And as I said in my last episode, if it’s not necessarily true, it’s wrong. So just make sure you do it right. Make sure that you’re airtight and it is a strategy that is legitimate for you and can save you a lot of money in the long run.
When you’re hiring your children in your business, the most important thing that you need to know is that this strategy is absolutely legal. I know that a lot of people get skeptical when they hear “Oh, you can hire your child and pay them $12,000 and write it off and no, there’s no tax that has to be paid on it.” And it’s actually very legal. But again, you just have to make sure that you’re doing everything the right way. There are even special tax savings for certain parents that hire their children in their business. So that lets you know that you know, it is definitely a legal strategy. There are so many opportunities in the tax code for you to legally reduce your tax liability as a business owner – I can’t even go over all of them because there are so many, but you just have to go out there and find them. The IRS is not going to send you a love letter telling you about all the extra taxes that you paid because you missed out on some deductions, so make sure you take these deductions next year. They’re not going to do it. Those opportunities are out there, but you have to go get them. If you don’t know, personally, how to go get them, then you need to hire somebody to go get them for you.
It’s also important when you’re hiring your children in your business, that you understand that your children are actual employees of the business and have to be treated as actual employees.
This means that you need to have employment paperwork, you need to pay a reasonable wage, you need to keep proper payroll records, you need to file forms W-2 – basically, anything that you would do for an employee that’s not your kid, you would need to do for your child as well. And really, truthfully, to be honest, you probably need to do even more for your child than you would do for anybody else. You probably need to go OD on the paper trail. The courts and the IRS do scrutinize these relationships, because they want to make sure that there is an actual employer/employee relationship, and they want to make sure that the child is actually performing services for the business. So they’re gonna get all up in your business. If you ever were to be audited by the IRS for this purpose, they’re going to get all up in it and make sure that you have all of your paperwork. They’re going to make sure you’ve dotted all your I’s and you’ve crossed all your T’s and you’re on your P’s and Q’s and all those other things that means stuff. It’s important that you make sure that you’re on top of it, you do it right, you don’t half ass it, you make sure you have all of your paperwork, your paper trail, you file whatever things needs to be filed, you keep records of everything… so that if they ever come to you and want to know whether or not this is a real transaction, or were you just paying your child because they’re your child and really didn’t do anything, you can provide them with the documentation to back up everything that you’ve done in your business related to your child being employed there.
Over the next few weeks, I’ll be discussing hiring your children in your business a little bit more. So I have a couple different topics planned for the next several week, but I do have a brand new ebook available now that 1) discusses the strategy behind the strategy, 2) explains how it works – I even put some examples in there so you can see the math, 3) and it even provides some action steps to make sure you do it right. There’s even a bonus workbook that you can kind of use to document your process behind hiring your child and your business just to make sure you have that paper trail. So if that’s something you’re interested in, you can visit www.themillennialtaxpert.com/hireyourkids to grab your copy. I worked really hard on it – so if you get it let me know how you what you think about it, you can send me an email at firstname.lastname@example.org with any feedback. I would love to hear what you have to say about it, because I do plan on doing more digital products so your feedback will help me make sure that I’m providing the content that you want. Even just this with podcast episodes and YouTube videos (because I do plan on getting back into doing YouTube videos), let me know what you think so that I can make sure I’m giving you the content that you actually want and need.
Make sure you join me next Wednesday, when I talk about the four mistakes that you want to avoid when you’re hiring your children in your business.
I’ll talk to you then.
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