Tax Matters

Child Labor - How to help your children

How do you teach your children responsibility to others, and in their finances? If you are an entrepreneur, you might consider requiring their serious efforts at your business or practice. At a young age, children can perform many meaningful and needed jobs, from running the vacuum and other cleaning tasks, to sorting and filing.

At an older age, they may even research issues with which they are more familiar, such as use of social media, selection of the most utilitarian smart phones, articles for your company Website (or creating website if you are too retro to have done so). Thus we inform and educate our children to the responsibilities involved in a working world - but how is this useful to teach financial responsibility? Let's take it by the numbers -

1. You may pay a reasonable wage to your child. Your child is a minor, and as such you may dictate where the money goes. Savings, investments OR some of it to an IRA, whether Roth or traditional. We recommend that some be set aside for rewards - such as special events, tech gear or other items to be mutually chosen with parents. Let them know that in real life, you must meet the costs of shelter, food, clothing, transportation, health care and to save for their future - including retirement. By dictating the savings/investments are first, share with them that this is akin to the costs of daily life. They can enjoy a bit of what is left after meeting that target, and you give them a head start on their future.

2. They need a job description and periodic reviews. If your company is big enough and you have the right person to do this, have them report to a non-family member who does a written evaluation on a regular basis.

3. Have them fill out a W-4, withhold taxes as required and issue a W-2 to them. They are exempt from Social Security if under age 18, and generally do not qualify for fringe benefits as part-time as well as under the age most plans require; they may have no tax required to be withheld (see below).

4. They are on the payroll, and must keep time sheet records. If you are able, have the funds deposited to a custodial account, or just have them endorse the checks for deposit. If they do a good job, be sure to bonus them reasonably and meet your commitments to use some part of their compensation for goodies they can now enjoy.

How valuable is this? For 2011, the amount which will result in NO INCOME TAX is $5,800 and you still take your child as a dependent for your tax return. If you can justify more income (summer work at more hours, for example), you may add $2,000 and direct that much to a deductible IRA for your child. Consider that $100 per week is $20 per day, possibly at $8 to $10 per hour for a 5 day week, and weekends may add to the result.We all know that after school activities have become an important part of child raising, and the balance may be difficult. If it works for you, it may be valuable in more ways than economic.