Hiring Your Children Part III: Family Management Companies & Streamlining Payroll

If you caught Part I two weeks ago, we discussed the tax benefits and general formalities of hiring your child through your business.

One of the things we learned is that the key to avoiding FICA taxes (i.e. social security and medicare) on their income is by hiring them through a sole proprietorship or through a partnership where the only partners are the parents of the child. 

But what if you own an S-Corp or another entity that doesn’t meet the requirements above?  

Luckily, there is a strategy for that…

Establish a Family Management Company

Again, if your business is not a sole proprietorship or a partnership where the only partners are the parents, your children will be subject to FICA and FUTA taxes. 

But this doesn’t mean you’re out of luck if you run a corporation (such as an S-Corp), or a partnership where there are other partners. 

The way to get around this is by establishing a family management company as a sole proprietorship. This is essentially a staffing company that will hire your children and handles the hiring formalities we discussed last week.

The family management company will then create an agreement and charge your corporation or partnership fees for the services your children perform.

And boom, no FICA and FUTA!

The key is documenting everything correctly and following the formalities we discussed last week as well as traditional formalities, such as bookkeeping, that come with running a business.

Bonus: How to Streamline Payroll When Hiring Your Children

Another key to hiring your children and using the Roth IRA strategy discussed in Part II is hiring them as W-2 employees. 

The downside to hiring a W-2 employee is the additional tax compliance requirements. With an independent contractor, you can simply file a Form 1099-NEC the following year and be done with it. However, with a W-2 employee, you’ll generally have to run payroll and file Forms 940, 941, and W-2. 

This of course comes with more complexity and expenses as these forms are generally filed by a payroll provider or CPA.

The good news is if your child is under the age of 18, then technically Forms 940 and 941 are not required and you can get away with just filing a Form W-2 which can be done relatively easily and inexpensively through providers such as www.Track1099.com  

The Bottom Line

Even if you run a business that is not structured as a sole proprietorship or husband and wife partnership, it’s possible to establish a family management company as a sole protectorship to pay your children through and avoid FICA and FUTA taxes. 

Also, if you plan on contributing their earnings to an IRA, filing a W-2 for each child you hire within your business is generally all that is needed.