At FinCon 2016 (read my review) Jr was a shrewd negotiator in several business meetings, and an immaculate host for our guests on the houseboat. Clearly he is ready to step out of the shadow of his parents and build a place for himself in this world.
We discussed at length what opportunities would be the best fit for his skill set and experience. It has always been my goal that we coach him to be a problem solver and risk taker. Rather than asking what he wants to be when he grows up, we might ask “What improvements to the world would be most exciting for you to pursue?”
That must have been a little deep, because he just smiled and tried to look cute. And then it dawned on us…
Perhaps modeling is his ticket. I’m very skeptical of our own judgement on his photogenics, but strangers are always telling us he is a cutie. And child models can make $100/hour and up to $10k/year! So at his request, I helped put together a resume:
Seeking: a part time modeling position with flexible location.
Willing to travel.
Education: School of life
Dr. Seuss & Eric Carle books
My Mother is _always_ taking my photo
Taipei Neighborhood Park Ninja Warrior Champion
Traveled through 16 countries in my first 16 months
Other skills: Bilingual (Chinese, English)
Expert at making animal noises
Interests: Airplanes, anything with wheels, swimming, cheese
Attached: photo portfolio
“Life is what happens to you while you’re busy making other plans” – Allen Saunders
Being practical people, we have a backup plan. A Plan B if you will…
We can simply hire Jr into the family business! If it is good enough for the oligarchs and mafiosos, it is good enough for us.
Challenging work will help build character, but it is also good for…
As a sole proprietorship, Go Curry Cracker has tax advantages over other business structures when it comes to hiring minor children. (LLCs taxed as sole proprietorship or family partnership also work.)
There is no requirement to withhold or pay Social Security or Medicare taxes. This is a savings of 15.3%.
With earned income, Jr would need to file his own tax return each year. With his own standard deduction, he could earn $6,300 in 2016 completely tax free. His income is our business expense, which would otherwise be taxed at 15%+. (See 2015 tax return.)
In real numbers, paying Jr $6,300 per year would save:
15.3% Self-employment taxes: $964
15% Federal Income tax: $945
And I still get to claim him as a deduction and get the full benefit of the Child Tax Credit.
What would Jr do with an extra $525 per month of walking around money? Why contribute it to his Roth IRA, of course. (Chip off the old block, that boy is.) Well, most of it anyway… the 2016 contribution limit is $5,500.
While I’m not a huge fan of aspiring early retirees contributing earned income to a Roth IRA while working, when that income is taxed at 0% the Roth IRA is perfect. This income will be tax free today, and all growth will be tax free forever.
With a maximum contribution of $5500 from age 3 to age 18, invested 100% in equities (assumed 7% constant real growth), by the time college rolls around he will have a cool $150k. My own annual tax savings will have grown to $50k. That should cover at least one college degree.
And assets in retirement accounts aren’t factored in calculations of college financial aid eligibility. (Withdrawals count, assets don’t.)
Since we are dealing with the IRS and tax law, of course nothing is easy. There are restrictions and things to watch out for.
I can’t just pay Jr $6,300 per year for doing household chores, doing his home work, or for watching television. No, the work must be legitimate and providing value to the business. This has to be work that you would hire others to perform.
I also can’t just pay Jr $6,300 for an hour of his time. The rate must be reasonable and commensurate with the type of work. Minimum wage is a rational starting point for basic tasks. I could also pay a license fee for photos or perhaps a per word or revenue sharing agreement for blog posts. Over time, he could take on roles in social media promotion, accounting, and programming.
(Apologies in advance for all of the child authored content about to appear in the personal finance blogosphere! :p )
Paperwork is also required. You need to document and keep records, and submit a W-2 form to the IRS.
And someone will ask, what about the kiddie tax? This only applies to non-earned (investment) income.
Nobody really wants to work for the man. Unless that man is your father! If that modeling* or acting career doesn’t work out, the family business is always a good plan B.
There are tremendous tax benefits to hiring your own minor children. These benefits are both immediate (save money now) and long term (tax free growth via Roth IRAs.) This is of course in addition to the intangible benefits of building character and work ethic.
Between tax savings and tax free growth, working from toddler to teenager can generate $200k for college or other fruitful endeavors. What better way to build a child’s financial future than through their own contribution.
* If you happen to work in the industry, please send me an email.
Love it! We could have hired both our kids to help with our rental properties. They can mow lawns, paint, scrub bathtubs (OK – yea, they would hate that idea!) – but they used to fight over the riding mower! We never did it though – always worried about the “red flag” on our taxes. That was a silly excuse but one that we heard over and over. Wish I had my act together and learned more about it rather than just listening to everyone. And yep, that little one definitely is a cutie!
I can definitely understand wanting to avoid the dreaded audit.
I figure I’ll have one some day since I’m a bit of an arrogant SOB about the whole no tax thing all over the Internet.
Too bad though. Rental businesses are ideal for child labor :)
Man, I thought I started working early! I didn’t make anything near $6,300 at my first job, but then again, my resume did not look anything like that :)
My first job was probably delivering a weekly newspaper for maybe $50/month. My resume at the time was definitely lacking.
GCCJr provided some incredibly useful input to our meetings. Mostly along the lines of 飞机!
He definitely likes his airplanes. Camping him out on a houseboat right next to an airport is like a dream come true. (nice use of Chinese ;) )
That is a great way to generate earned income for Jr, which could be used for his Roth IRA plan. I could imagine that if you manage to max out his Roth IRA from age 1 to 18 , and compound that for a few decades,you could turn him into Roth millionaire.
One question of course that you may get is – does the Roth IRA affect his chance of getting a scholarship if he decides to go to college in the US?
Presumably you mean financial aid?
Retirement accounts aren’t included in the calculations for determining aid, so even with $150k in a Roth it would be the same as having zero.
I think that’s what I meant ;-0
My next thought is – why stop at hiring GCC jr only for the GCC franchise as a model.
It seems like you may be limiting his potential.
Would there be any others willing to put a picture of a baby on their diaper, baby food, clothing products?
If you set up their own blog, instagram, twitter, youtube, and they do earn money monetizing their digital assets, wouldn’t most of those earnings be Jr’s?
Or alternatively, is there a way to legally transfer ownership of the GCC franchise over to GCC Jr, have GCC & Wendy as employees, and GCC Jr as the capitalist in charge?
Perhaps the real goal should be to help GCC Jr retire by the age of 20.
I am saying all of that semi-jokingly however…
What a great idea! We brushed over this concept a couple of years ago, but didn’t do the research on it. Thanks for putting it down here for us to consider again. We’ve got a 5 year old who loves to help out. This could be a good way to get them involved, and to help him learn about savings along the way. Here he is telling his own story in a sample podcast we did for a show I’m building. He can be a voice actor, as well as writer. http://jeremystrozer.com/h3blog/2016/5/27/u-175?rq=podcast
I hear voice acting is a hard business to get in to… it’s almost like you have to know somebody ;)
Yeah, there are great educational opportunities with saving, investing, financial responsibility… it’s nearly perfect.
Very timely article. :) Our daughter just landed her first contract position yesterday at age 10. She’s tutoring a third grader in math and reading for $10 per hour (and they rode bikes in the backyard afterward :) ). What to do with all this newfound wealth and largesse? I’m thinking a Roth IRA would be a perfect way to establish a foothold on her future financial independence!
I’m still thinking about blog-related tasks she can perform and get paid for. It could definitely be a way to reduce my taxable income while sheltering $$ in tax free status for her.
In my reading, I also found that dependents don’t have to file taxes if they earn less than $6300 and have minimal investment income (<$350??). Relevant part of Pub 929: https://www.irs.gov/publications/p929/ar02.html#en_US_2015_publink1000203738
Is that how you think you'll be able to get out of paying the 15.3% SS/medicare payroll taxes for GCCJr?
$10/hour at age 10? Very nice!
Children employed by parents in a non-corporate family business don’t need to pay FICA. It’s unrelated to how much income is involved. See “Child employed by parents” on IRS website.
Your daughter would still have to file if she earns more than $400 from self-employment. See here.
Ok, thanks for the clarification. That $6300 exemption from SE tax seemed too good to be true (which is the case). But I could still employ my 3 kids for $6300 each and not have to file a tax return for them. Nice way to clear out a chunk of tax liability for the blog income.
I guess I’ll have to teach her how to fill out a 1040 if her 2017 net income exceeds $400.
Root of Good – Here are a few examples- This site also has a good spreadsheet to use for kids to document their earnings.
Heads up – I’m setting up a custodial roth for my 6 yo via vanguard, and vanguard explicitly told me if we contribute to her roth, we have to file taxes even if she owes $0.
Do you know how this works for corporate family businesses (S-Corp)?
All employees of an S-corp pay payroll taxes, even children of the owner.
Is the $400 limit accurate? Notice the wordings on the website at IRS:
“A dependent must also file a tax return if he or she:
Had net earnings from self-employment of at least $400.”
I think you should state it as “Your daughter would still have to file if she earns more than or equal to $400.”
Or “Your daughter would still have to file if she earns at least $400.”
Therefore, you can’t just contribute to her Roth IRA at $400 but it should be $399?
Sure, that works.
Combine Plans A and B. Hire Jr as a model for GCC blog photos. You owe him a ton in back pay already.
I’m trying to figure out what would be considered reasonable pay for this. I just need to figure that out before 12/31 so we can make a partial 2016 IRA contribution.
You should talk to some of the other PF bloggers, as I think many are doing this and went through the same analysis for figuring out the market rate for child models. I think White Coat Investor does this.
Ha, that’s what I was thinking GCC was saying with this post – use GCCJr as a model for the site, pay him out the earnings, fund his Roth with earnings etc.
This is exactly how my dad helped save money for us growing up. And I can’t wait to do this with my children. First thing: we need to come up with a “business” that actually has an income to pay the children. :)
I didn’t start working until I was 14. I was a slacker. I think I’ll take the same route as you so that they can start contributing to their Roth IRA as a toddler! I wonder what is a reasonable comp since his pictures are all over your posts and Instagram.
Fellow slacker here.
I’m not sure about reasonable comp yet. Baby models can earn $100/day with just 2-3 hours of work. Or maybe photo licensing fees are a better way to calculate. I have some research to do.
I heard this tax strategy on 2 podcasts (BiggerPockets and Radical Personal Finance) and I thought it was brilliant. But isn’t there a minimum age when kids can work like 14…depending on the state? Or is it different if you work for a parent? It would seem more likely to raise a red flag if you hire your kids at a very young age.
There is no minimum age. But obviously you can’t hire a baby as your legal counsel or chauffeur. It has to be work they can legitimately perform.
Interesting idea to reduce taxable income.
I guess I better start sanitizing these blog comments…you’ve got kids working here! :)
I’ve got a couple of these little employees myself…if only I could get them to do something useful….
Awesome article, Jeremy. I never thought about the angle with Roth’s not counting again financial aid criteria, yet you can withdraw to pay for college tuition. THAT is brilliant. I wonder if there are any other pluses and minues compared with traditional education savings vehicles?
My brother and I got paid $8.00/hr to paint my dad’s rental properties when we were 10 & 12. Not only did he overpay us, I think he had to redo half of the painting anyway. Ha.
I think my oldest daughter could fit into this entrepreneurial plan nicely. She bugged me all summer about a lemonade stand, and after we finally did it she came inside and counted her money on the kitchen table like Scruge Mcduck. Lol. Here’s a photo: http://wp.me/a2JZq5-2kL
haha, great pic! My nieces had a cookie stand this summer and we contributed a couple dollars to their cash hoard as well.
Another plus for the Roth is funds can be used for anything, not just higher education expenses. If/when the time comes to pay for college, I won’t be doing Roth withdrawals. Better to let those $$$ continue to compound tax free for another few decades and pay from taxable accounts instead.
Yeah, amazing how kids take to piling up and counting cash!
That makes sense on letting Roth continue to compound unless absolutely necessary. Our primary plan for college tuition (before this article!) was just to use a rental house for each of our kids. I wrote about the specifics here: http://wp.me/p2JZq5-1XR
This seems like a pretty great plan, especially if you can come up with a semi-legitimate role for the little one.
I’m skeptical of child modeling. You don’t want Jr. getting an inflated ego.
I’m not too worried about excessive self-esteem at this point. If it started to get out of hand, his mother could just follow him around and point out all of the things he is doing wrong. That seems to work to keep my ego in check ;)
Just kidding. Kinda.
GCCjr could start working as a cub reporter for your website. And start off by offering advice to other children. It’s time kids starting learning about money and saving early. That should be a ligit biz expense!
As the BITAs don’t have a family business, and have neither the time nor the patience to devote to Toddler BITA’s modeling career, what we’re left with is convincing other people to pay Toddler BITA for services provided. Some options are:
1. Stone collector. If you have pebbles that you urgently need to get rid of, Toddler BITA is your go to person. She steals stones from neighbour’s yards when we are out walking, she might as well get paid for it. You know what they say about finding a job your love and never working a day in your life.
2. Enforcer. Toddler BITA is big on rules and ensuring that everyone follows the rules. She is quick to point out if a rule is being broken and does not shy away from using all the volume at her disposal to ensure that she is heard and justice and fairness prevail.
3. Bacon taster. Enough said.
In the unlikely event that none of these pan out that Roth IRA is going to have to wait until she is a bit older and better able to market her ever expanding set of skills.
I would definitely consider returning to full time employment as a bacon tester.
Our kids would probably enjoy hanging out. Jr had a stone collection from every country we visited.
Interesting concept but not sure it’s legal or not. I guess you can consider legal to pay your under-aged child money to share his pics on the blog and claim as his earnings to reduce your taxable income as long as it’s not spelled out otherwise by the IRS. Would you not wish to discuss this with a CPA, IRS agent or tax attorney first?
I thought that you wrote this ‘article-idea’ as a light joke, but per comments it sounds you’re really considering to ‘create a job’ for your baby. Yep, I agree your boy is cute (mine was/is too :-)), but I never imagined that parents taking pics of their kids for their memories and than slapping them on their blogs create ‘work revenue’ for the little one. If it really works then I guess gazilions of parents posting their kids’ pics on FB, Instagram and wherever should consider starting blogs, link or re-post the same pics on those blogs and ‘pay money to fund children’s Roth IRA’s’. I guess everything is possible.
Anyway, I see a child tutoring another child as labor or your child posing for a child related web that sells some kind of related child product/service also a labor, but for your own blog, hmm?? I think I like your idea creating a website for GCCjr but you’d need an idea what’s behind. Photo album alone is not a great business model IMO.
I would never joke about taxes :)
It sounds like you think a blog is not a legitimate business. If it earns income, it’s a business. That includes Instagram accounts, playing video games, and taking pictures of your butt.
You’re definitely a “child related website” in the FIRE world. I think you and I both get cited as examples of how to FIRE with kid(s). Those pretty pictures certainly add to your blog’s appeal. More blog appeal = more clicks and more revenue.
We hired our two children in our business. They did the cleaning, lawn maintenance, kept the car clean and learned bookkeeping. We put the money in their Roths. They recently made withdrawals tax fee to buy three cash flowing rental properties. This has allowed our son to quit his job and write his first novel.
My daughter was a baby model, even had a full page ad in the Boston Globe. She became somewhat in demand because, besides being a beautiful child, she had the perfect temperament. It generally took an hour to set up the shot with all the props and lighting, and she could easily do that before getting cranky. So often the photographer used her to set up the shot, then switched in another baby. It actually wasn’t in her favor because they paid her less since she wasn’t in the ad.
Print ads don’t pay very well, it’s the tv/videos that can really rack up the income, at least that was the situation 25 years ago. And Boston didn’t have that big a need for baby models. Once the novelty wore off, I said forget it. I did not want to push her into child acting because that’s child abuse, especially if you don’t need the money. If your family is starving, that another story all together.
Our baby girl made about $1,000 in her first career in a fairly short time, at the age of six months.Her “earned” income was more than mine that year. ;-)
Thank you for sharing your example. This is great!
I’m looking forward to the day when Jr earns more than I do. Chinese culture says the eldest son is responsible for caring for the parents in their old age…Then I’ll just be able to kick back and relax, maybe even retire and travel the world.
I’d hire him. If I had a modeling business.
Sounds like a good side hustle
“Rather than asking what he wants to be when he grows up, we might ask “What improvements to the world would be most exciting for you to pursue?”
I’m stealing this if we end up having kids.
Oh and with all the cash GCC Jr is banking for you, I think you should promote him to CFO (aka “Chief Farting Officer”). What do ya say?
No, that’s my job!
He is taking on a bit of an accounting role though. He gets pretty upset if we don’t let him hand the credit card over at restaurants.
I like this post. I think we discussed this idea of using the kids as models, etc. in a previous comment to you a month or two ago. You may recall that I (embarrassingly) referred to Jr. as a female. Anyways, it sounds like you did a bit of homework on it. I like the post and all of your content. Thanks again for sharing what you do.
Thanks Doug. Yeah, I’ve been noodling on this topic for quite awhile, and finally was able to do some research.
Don’t worry about the he/she thing. At least 55% of people we meet think he is a girl.
Or at least they used to before we gave him a fauxhawk hairstyle ;)
My daughter (9 months old) started doing some modeling and is actually on a tv show right now! She gets paid $250 for each taping, whether she sleeps in a crib, cries, or is in a scene.
Putting it in her Roth IRA is exactly what we’re doing. Maybe when she’s old enough we’ll be able to hire her, but seeing her adorable face on tv makes me laugh every time.
We live near a university (Northwestern), and they have an Infant Cognition Lab that studies how early babies understand the laws of physics. You sign up and get an email if your child is of the age to be eligible for several studies. Our little guy is 8 months – so far we’ve brought him in thrice for a half-hour experiment, at $20 each time. Granted, we do this far more because we’re science geeks, but $40/hour looks mighty good on a resume…
Will you still travel … when your children are …. in Primary school?
Local schools are sometimes available overseas like in Germany …. but then the kids would need to learn German etc etc etc …. would you do home schooling as an option … or resettle somewhere back home for 12 years plus as your kids go to school? I am curious as to your ideas on this …. Presently our 7 year old is going through the Beijing school system – Free! … versus the mega expensive international schools … I teach her English on the side …. but am considering Europe …. Germany … Austria … but there would be obstacles … if I liquidate my assets … I could do this anywhere in the world …. but I am hesitating for now …. God Bless, Beijing, A Canadian in China ? (P.S. We just spent a month in Europe … Alps area … this summer including Salzburg and Vienna … very nice! )
Probably. Maybe. We’ll figure it out as we go.
We were recently interviewed by Millennial Revolution about traveling with kids, and talked about our options a bit.
I love the idea of local schools. It’s a great way to integrate into a new culture.
While I never created a job for them, I have always contributed to an IRA any earned income they had. I should have started even with the babysitting and lawn mowing jobs they had.
It doesn’t save on taxes, but I hope it gives them the message that saving is important. My only requirement is that they promise to talk to me first before making an early withdrawal. That there may be better options.
If you’re investing in a Roth IRA for his college tuition how do you begin withdrawals without penalties?
There are a few options.
Contributions can be withdrawn at any time for any purpose without tax or penalty. With $5500 annual contributions from age 3 to 18, $88k worth of contributions would be available.
You can withdraw earnings for qualified education expenses, but they would be subject to income tax. Jr could make annual withdrawals up to the standard deduction tax free, assuming no earned income while in school ($6,300 in 2016.) He could withdraw another ~$9k annually at the 10% marginal rate.
But money is fungible. I already have earmarked sufficient funds to pay for college in my brokerage account, so the plan would be to just let Jr’s Roth IRA continue to grow.
You have summed up one of my major goals for 2017 in this post. Inspired by this article (http://richersoul.com/2015/12/16/i-gave-my-kids-200000-for-christmas-do-you-want-to-learn-the-secret/) my kids have been working for my family real estate business this year. Two days ago, we mailed in all the paperwork to open their Roth IRAs. Yahoo! My kids, 11 & 13 yrs old, do all the bookkeeping in QuickBooks for our own real estate holdings, and also for some investors I know. While I’m excited about the Roth IRA, you’ve missed one of the most valuable pieces of this puzzle. My kids are older, so this still may be in your future. It has been an amazing (and often frustrating) journey teaching my kids this year how to work. Prior to this year, my youngest couldn’t touch type. She can now! Crummy attitudes don’t fly at work… Mom will fire you. How do you compose a professional email? What does an invoice look like, and how to do you politely ask to be paid. What happens if the customer still hasn’t paid you, and you need to remind them? Eye contact. Hand shakes. I’ve done a lot of the heavy lifting to help my girls learn how to have a business persona. I’m actually quite sure that the skills they have learned in order to earn money to contribute to their Roths are way more valuable than the tax benefits their Roth. I also feel the government got good value for their tax benefits with my free instruction on being a quality employee. Win! Win! Win!
I read the benefit is up to 11,800….the 6,300 + 5,500 Roth IRA contribution.
THE TAX IMPLICATIONS
In 2016, you can pay your child up to $11,800 (standard deduction equal to earned income up to a maximum of $6,300, plus $5,500 deductible IRA contribution) without either of you incurring a tax liability. That’s because reasonable wages you pay to your minor child to work are fully deductible as a legitimate business expense, lowering your gross income. For your son or daughter, the standard deduction and IRA contribution eliminates all of the tax on the child’s income. And since the money was earned, the “kiddie tax” doesn’t apply even if your child is under age 24.
A Roth IRA is not deductible.
Thanks for the heads up on that, looks like the article I referenced is just dead wrong! Maybe they meant that the tax would be eliminated? I’m not tax savvy by any means but am looking to learn.
As someone that’s read your savings plan and how you guys saved…knowing what you know now, mainly the part that ‘early retirement’ doesn’t mean you stop earning money in the future, but are free to pursue passions vs. working for the good paycheck, would you have stopped and ‘retired’ earlier than what you did?
As a married father of 2 (both under the age of 3), I can extrapolate the existing 401k/traditional IRA and calculate the 4% rule to figure my ‘retirement’ number. My struggle is pulling the trigger when I’m only ‘halfway there’ and then potentially supplementing income as needed after making the plunge.
I’m rambling a bit, but knowing what you do now (because it sounds like you have way more than what you will ever spend, barring any catastrophic events…) would you have pulled the trigger and started traveling 5 years earlier??
Sorry if this question has already been asked in another blog post I don’t know of a way to search all comments?!?
The article isn’t wrong. A child working for $11.8k per year in the family biz could pay zero tax by contributing to a Traditional (deductible) IRA each year rather than a Roth. This avoids the parents’ 33% (from the article) and the child’s 10% marginal tax rates.
This probably isn’t the best move, however.
If that child is saving for retirement starting at such a young age, and with a high earning family business to takeover or inherit, then certainly they will be making future withdrawals at much higher than a 10% marginal rate. They should choose Roth.
If they are saving for college in IRAs, then it is potentially a wash. But with the potential for scholarships or no higher education on the horizon, the fallback is retirement savings and therefore Roth.
Were you able to fund your son’s Roth IRA last year?
I am curious what was the employment that you used and what was the payment that he received hourly/daily/yearly, trying to start my son’s this year.