Is Hiring Your Child in Your Business a Smart Move? Exploring the Benefits and Considerations
It’s hard to predict what will happen to colleges in the future. There is one thing that’s certain, college is expensive, and its cost is probably only going to increase. That’s why in our education planning, we consider a college inflation rate of 5%. Keeping this in mind, let’s explore the benefits and considerations of hiring your child in your business.
If you have tiny humans running around your house, I’m sure you’re worried about the pace of change and how to set them up for success. As a parent, you are their first teacher and are probably already aware of your limitations when answering questions such as “Why do the leaves only change color on some trees? Why doesn’t the moon fall? Why does Google know more than you? “
How children learn now is different.
Education is changing.
Education has changed.
ChatGPT is the latest fad in technology that automatically generates text based on written prompts and is much more advanced than previous artificial intelligence platforms. Its ability to ascertain and process information is so fast that it recently passed a Wharton MBA and recently had Microsoft enter a multibillion-dollar investment in its maker OpenAI. Just reading headlines like this makes me question the pressure my toddler will face in twenty years, not just to be ahead of the curve but to keep up.
Mark Cuban has used his megaphone to promote the importance of learning and understanding artificial intelligence. Students will be focused on something other than mastering a subject to pass tests. They’ll be learning due to curiosity and being able to go down any rabbit hole they’re interested in with the device in their pocket. They will have access to the brightest minds, not in the country, but the world, and these subject matter experts, the future teachers, will be able to charge whatever fees they want.
This debate is personal and should align with your family’s values on higher education and what you want for your child. If your child has always wanted to be an attorney fighting injustice in the world, then graduate school is likely a high probability for her.
So, Is Hiring Your Child in Your Business a Smart Move?
Let’s start with an example: The cost to attend Penn State University in 2022 is $38,500. Let’s assume that Penn State offered Isabella a $5,000 merit scholarship ($33,500). If Isabella can demonstrate that she is providing at least half of her support from her earnings ($16,750), she will be allowed to come off her parent’s tax return and file independently. If Isabella earned at least $16,750 and filed her own tax return, she would fall into the 10 % tax bracket after the $13,850 standard deduction for single filers. She could save the $2,900 into a Traditional IRA and not have any taxes to pay, or she could save it into a Roth IRA and pay $290 in taxes. Isabella’s parents could also gift her appreciated assets, and she could have further tax savings by having a 0% capital gains tax rate.
How can you justify paying your child $16,750 per year or $1,396 monthly?
One of the penalties of being a successful business owner is that you may pay more for your child’s college education. Small business owners can hire their children and pay them under the standard deduction, and have them save their earnings in a Roth IRA account. This is a tax-advantaged planning strategy, where you are moving dollars away from making a tax payment and saving toward a college cost. Your child would have to do legitimate work. Never put yourself in a position ever to have to explain to the IRS how your toddler is helping with the office cleaning. If you have a teenager, you could employ them to assist with your social media marketing. If you have a younger child, you could use them in your marketing materials or website photos.
Check out our other article on the three main types of education accounts to save for your child.
Conclusion – Business Owners may want to consider hiring their child in their business
Parents want their children to remain in Neverland with stubby fingers and curious minds. Unfortunately, the only constant is change. As college draws closer and your child leaves your warm, protected nest, parents need to reevaluate their family’s values and their child’s personality and, most importantly, prepare themselves and their kids with the skills to adapt to the changing higher education landscape.
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