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Paying Children for Work at Office

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  • Paying Children for Work at Office

    My children have been working for me for free but I now see the benefit of paying them on the books.  I have one employee that works part time so I just got payroll up and running thanks to suggestions I found on this forum.  Do I pay my kids as 1099 or W2?  I understand that it has to be reasonable pay for the work they do.  What is the benefit of setting up a ROTH for them?  Is that better than putting it into 529? Any other thoughts or resources out there I need to know about?  Thanks again for all the help.

  • #2
    Roth would be better unless they are going to be eligible for real financial aid in college, which is unlikely if you are a physician.


    • #3
      It is not proper to pay children as independent contractors on a 1099-MISC. There is no way they would pass IRS guidance on W-2 employee vs. independent contractor.

      Not to mention that they would have to pay Self-employment tax. Especially since, if you are an unincorporated business, there is no FICA for your children < 18 and no FUTA < 21. Do it the right way. Pay them as W-2 employees.

      Even if they are eligible for financial aid, a Roth would be a good choice. Retirement accounts are not included as assets for financial aid consideration.


      • #4
        WCICON24 EarlyBird
        There are even more reasons for a Roth IRA over a 529:

        • It grows tax free for your child's lifetime (or until used);

        • It can be used for anything (not just education);

        • Contributions can be taken out tax free;

        • Can do a once-per-year 60-day rollover;

        • Roth IRAs do not have RMDs at age 70.5 (while 401k's and TIRAs do).

        The 529 should be funded by the parent and other family members when your children are young, if possible, because it has a relatively short life-cycle unless transferred to other children. Start a Roth for your child when s/he is young, and you are planting a tree that can grow for a lifetime and into the next generation's.

        A huge reason to pay your children from your business is that you are transferring income taxed at your top marginal bracket to their tax bracket (probably 0% if the proposed brackets stand) and your child earns < $12k/yr). That's huge! You'll also transfer FICA-taxable income to non-FICA taxable income if you are operating as an unincorporated business as spiritrider referenced. Pay your children a reasonable wage and document, same as you do for other employees.
        My passion is protecting clients and others from predatory and ignorant advisors 270-247-6087 for CPA clients (we are Flat Fee for both CPA & Fee-Only Financial Planning)
        Johanna Fox, CPA, CFP is affiliated with Wrenne Financial for financial planning clients