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.
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.