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Should We Employ Our Own Kids? (and How Much to Pay Them)

My Brother Wax Mannequin, training the next generation of workforce last summer.

Way back in 2015, I had a nine year old boy. Even back then, I could see him showing some early flashes of adulthood and maturity, and it got me wondering about his future as it relates to money and freedom.

So I wrote a post called What I’m Teaching My Son About Money, which shared some ideas about how we can raise our next generation of kids to be happy masters of money rather than the stressed-out slaves that most people (even those with high incomes) are today. And now, four years later, some of my predictions and questions from that article are starting to come true, and I’m wondering what to do about it.

To me, the biggest question is this:

Where is the balance between giving your kids a helpful boost, and “helping” them so much that you distort their view of the world and create a generation of Whining Complainypants Adults?

Opinions on this subject can vary widely, and in fact even you and I might have rather different views. But hopefully we can at least agree that the whole thing sits on a spectrum, and that even that spectrum itself is slippery because every child and every upbringing is unique.

So let’s get onto the same page with an attractive and scientific-looking diagram.

Almost any parent would agree that the left side of the spectrum is a bad place for kids to be born. Because it affects not just their childhoods, but their entire lives. So we strive to provide a life that is further to the right, keeping our kids fueled with food, love, and opportunities.

But as with all human pursuits, we have a tendency to go too far and get into the “Too Easy” end of the spectrum. We may be smothering our kids with too much “help”, or perhaps compensating for being so busy with our fancypants careers that we don’t have much time to spend with them.

While this all feels like common sense, there’s also some biology behind it. Babies and young kids who experience a harsh environment during this critical part of development will tend to grow up more optimized for survival and street smarts, with lower levels of trust and a harder time blending in with a peaceful society*.

And on the more fortunate side of the divide, children raised in peace and security will optimize more for “book smarts” intelligence as well as being more trusting and less prone to violence. The entire apparatus of our brain will end up wired differently, based on the experiences we have in early childhood.

The problem for wealthy people is that the human brain is not wired to stop at “enough”, because enough has not been a big part of our shared history.

So we tend to overdo it when creating a comfortable life for our own kids, often justifying it with this exact sentence:

“We work hard, so we can give our kids some of the opportunities and the nice things that we didn’t have in our own childhood.”

It sounds noble and honorable on the surface, but be careful, because we can ratchet that same justification up far beyond any reasonable lifestyles without realizing we are just stoking our own egos or compensating for our own fears (and perhaps battling our peers/competitors in the Who’s-the-Best-Parent Competition on Facebook).

And then these kids respond by developing in a different way that can have its own downsides. Not understanding what it means to be poor. A lack of life’s most valuable skill – the skill of efficiency, optimization and reducing waste. And even a lack of life satisfaction and balance in later adulthood, because of a focus on easy consumption rather than the joy of creation.

So with such a slippery slope and those two pointy arrowheads to navigate, what’s the ideal strategy for us parents?

I don’t have all the answers, but one idea I have been interested in for years seems to have a lot of advantages: Hiring your children to work in your own small business.

Just think about it. You get to do all of these things and more:

  • help your kids earn their own money
  • teach them the value of hard work
  • have more excuses to spend time together solving problems – maybe even as they grow into adults
  • potentially cut the family’s total tax bill by transferring income from the high tax bracket of the parents, to the low (or zero) bracket of the kids.

Of course, there are also a few traps to watch out for in running a family business:

  • the job you give them might be better (or worse) than what they could get elsewhere, leading to a distorted view of what it really means to work for a living
  • if you don’t get along particularly well, tying your fates together even closer in a company will magnify any problems in your relationship
  • your kids might miss out on other, broader life experiences they could have had out there in the real world (like my own formative jobs in the gas stations and convenience stores of my small town, which are still the source of stories and laughs to this day.)

Still, the potential benefits clearly outweigh the risks to me, so the idea remains an exciting one in my mind.

Little MM and the Budding YouTube Project

I have been dabbling with this with my own son for several years – he helped me with the arduous task of mailing out over 1200 MMM T-shirts a few years ago and occasionally helps his mother in her soap production enterprises. His earnings have typically been on a per-shirt or per-soap basis

But things really took a step up this past January when he talked me into dusting off the neglected MMM YouTube Channel and actually starting to produce some shows together. Because we started with the good luck of a partially established audience and we have put some real effort into it (13 episodes over these first six months), it has taken off a little bit and we now have over 27,000 subscribers and the channel has earned about $1600 in YouTube ad revenue so far.

As a fun incentive, I offered at the beginning to pay him a flat (low) fee for editing and producing each episode, then split the income from this venture equally beyond that. So now, the little dude has made $800 on top of his base fees for the work.

If this continues, it could grow into a real income, which is quite exciting but also brings up some interesting tax questions. After all, right now he is a dependent for tax purposes, which means at least one of his parents get a tax deduction for raising him. But if he earns his own money, he might rise out of this dependence and even start owing taxes on his own. So is it worth it?

Hey, Let’s Ask my Accountant!

Outsourcing my taxes to someone younger and more enthusiastic about it than me has worked wonders.

To get better advice, I decided to run this by my own business and personal tax accountant, Chris Care who runs his own firm called Care CPA. We talked over the ideas of family businesses and employing a child in greater detail.

In summary, the results are better than I expected, which explains why people are so keen to hire their children.

Here’s my brief Q&A with him. Thanks for your help Chris!

MMM – So the first question is, what are the basic rules about employing one’s own child in a family business. My first instinct is that it sounds smart, because you are shifting income from parents in a potentially high tax bracket, to kids in a low tax bracket. So overall as a family, your tax bill falls.

But Is it a good idea? How old do they have to be? Any things to watch out for?

Chris Care: The biggest thing to watch out for is making sure the children are old enough to actually work. A lot of business owners want to pay their 1-year-old $15,000 a year for “modeling” by putting their picture on the company website. To me, this is a stretch.

You also want to make sure you’re paying them in accordance with the tasks they’re doing. If they are 12 years old and filing paperwork for you, or cleaning your office, or other administrative tasks, you probably can’t justify paying them $50 an hour. You should make sure there is a clear job description, and keep an accurate record of the number of hours worked and the tasks performed, just like any other employee does at their job

MMM –  What is the current child tax credit amount, and how would it phase out if he started making his own money? And does this scale up and down with the parents income as well?

Chris Care – Currently, the child tax credit is up to $2,000 per child, with up to $1,400 being refundable if the credit exceeds your tax amount.

In general, as long as you can claim the child as a dependent, and your income is below $400k if married filing jointly ($200k otherwise), you can claim the child tax credit no matter how much money your child makes. Above this income, the child tax credit phases out, but it is still not related to the child’s own income.

MMM –  Oh wow, I didn’t realize that. And at what level would he need to start incurring his own income taxes? And as an employer, would I be on the hook for stuff like quarterly tax payments, unemployment insurance, worker compensation, and so on? Could he be more like a contractor and avoid these complexities?

Chris Care – It’s unlikely you could classify your own son as a contractor. The IRS used to have a 20-factor test, but recently they have been narrowing and cracking down on this issue – more details here: Behavior, Financial, and Type of Relationship

Aside from that, you’d have to handle things in the standard employee way:

  •  tax withholding from every paycheck, submitted to the government as part of a standard payroll process. (MMM Note – even I have to do this as an employee of my own LLC, I use a provider called ADP and am evaluating a newer one called Gusto).
  • quarterly payroll taxes for social security and medicare
  • State unemployment insurance if applicable in your state
  • FUTA (A form of Federal Unemployment Tax)

Just like any other taxpayer, the child will need to file a federal tax return if their earned income is above the standard deduction ($12,000 for 2018, and $12,200 for 2019). Note that state filing thresholds are often much lower than federal thresholds – check with your own accountant!

MMM –  If a kid is living at home with no expenses, he might be wise to put as much of this into retirement accounts and otherwise defer taxes. If my company offered an employee 401k plan, could he put away the full $19,000 per year, or is there an even better option? Maybe his own tax-deferred college savings plan?

Chris Care – As with any other employee, the child can participate in the company’s retirement plan, as long as the plan is written to allow minors to participate. The contribution limits will depend on the type of retirement plan. In your example of a 401k, the child could defer the full employee amount ($19,000 in 2019) as long as wages were at least that amount. He would also get the employer match if your company established one.

College savings plans are an option, though whether or not he can open his own would be a question for your specific provider. Financial service firms tend to get a little hesitant opening accounts for minors. You could always open one, and he could contribute to it.

MMM Summary: Wow, this is much better than I had even hoped. In rough terms terms, it sounds like if I can pay my son $30k from my company’s income, I might save about $10k in marginal income taxes, while his resulting tax bill would be quite minimal.

Thus, it makes sense for me to start paying him as a real employee, rather than just paying all the taxes at my own marginal rate and keeping it in our own family spreadsheet, as I do now. 

Chris Care – Yes, there are some good opportunities for tax optimization by hiring kids.

In general, if you can justifiably pay your child a wage from the family business, it is an excellent way to lower the family’s tax burden, and give them a massive boost in retirement savings (since 401k contributions add up way faster than IRA contributions).

Also, by owning the business, you can administer your own 401k plan – which means you don’t have to wonder if your employer’s plan will allow for a mega backdoor Roth, since you can design it that way! Just keep in mind, that 401k plan is for all employees, so any attributes you establish for family members would also be there for non-family members that you may hire.

Another optimization: if you were a sole proprietorship, or a partnership where both partners are parents of the child being employed, the child’s wages would not even be subject to SS/Medicare taxes.

This means you could pay them the $12,000 standard deduction plus $19,000 401k deferral, with zero income tax, zero SS/Medicare taxes, and zero Federal Unemployment tax. They may still be subject to state income tax and state unemployment tax, but those would be relatively minor.

You can essentially shove $31k into a zero tax situation, from potentially a ~35% situation.
This means it may be worth operating the youtube channel as a separate company, and employing your son as a real employee…

MMM – hmmm, lots to consider! For now, YouTube is still only a few hundred bucks per month so we are not there yet. But it sounds like little MM’s future is bright, as long as he remains motivated to work hard and be creative and keep producing.

Which is a good general philosophy for any of us: keep some good hard work as part of every day, whether you’re ten or one hundred years old. Doing good work and producing good things tends to lead to a good life.


A Few More Thoughts and Disclaimers from Mr. Care:

  • In all of these answers, I have assumed the child is a true employee, where he receives a regular paycheck and a W-2 at the end of the year, and the company is a C Corp or S Corp.
  • As with all tax planning, tax credits, and personal situations, there are exceptions and limitations. So we’ve made some broad assumptions to answer these questions. For me to post an exhaustive list of these would take an entire blog post of its own. Always check with your tax professional, or make sure you understand the IRS guidance.
  • generational wealth / inequality / dynasties / buffett
  • effective altruism

A Final Thought from MMM:

If all this sounds like wishful thinking to you because you don’t own your own business yet, I strongly encourage to start one! For the great majority of early retirees, having a small entrepreneurial pursuit is both a reassuring security blanket and a fascinating and fun way to explore life after the cubicles and commuting stage is over. The Joy Of Self Employment.


* This one of many interesting and sometimes untintuitive insights I got into Human nature when reading the rather excellent book Sapiens.

 

  • Chad July 20, 2019, 12:20 pm

    It’s been a long time in the coming to see people talking about this subject again. I was employed by my Uncle at 12 years old after my Dad Passed. I would do office work at his Paint Contracting Company and on His Farm on the weekends.

    It taught me the fundamentals of life at an early age and kept me out of trouble. I plan on doing this with my children as the get a little older. From what I recall looking at federal tax regulations the acceptable age for children performing “office tasks” like taking trash out and general cleanup and answering phones Ect was 6 or 9 years of age.

    People generally just become lazy and would rather give an allowance instead of optimizing things. Good read.

    Reply
  • David D July 20, 2019, 12:34 pm

    > $19,000 401k deferral, with zero income tax
    I wonder if a Roth 401k would be better here. Since their income is currently so low, their effective tax rate is near 0%. Their later-in-life income will probably incur much higher earned income tax rates than their low income. Might as well take income at that tax rate and stash the cash in a Roth 401k instead!

    Reply
    • Jeff W July 20, 2019, 3:30 pm

      Just keep an eye on the condensed marginal tax rate brackets for the the kiddie tax after you exceed the standard deduction.

      Reply
  • Juan July 20, 2019, 12:38 pm

    Great post as usual.
    One thing I’d add/question is the “unlimited” income potential of the child before losing the child tax credit.
    Isn’t one of the requirements to claim your child as a dependent that they cannot provide more than half their own support?
    In this case, if they child earned $15K but the entirety of his/her support was $20K, couldn’t the IRS make the argument that the child doesn’t qualify for the child tax credit because they provide more than half of their own support?

    Reply
    • Gordo July 20, 2019, 1:51 pm

      It’s also a bad idea to run the YouTube channel as it’s own separate LLC since it would always show large paper losses which would be an IRS red flag.

      Reply
      • Chris Care July 21, 2019, 8:28 pm

        It may not. The only expenses are probably minor editing/filming equipment and wages.
        Knowing MMM, he probably didn’t spend much on a camera and microphone, and there are free editing softwares available. If the only real expense is wages paid to Little MM, the LLC may just end up being breakeven, or even show a profit. I don’t see why this would be a loss unless he was paying more wages than earnings, which doesn’t seem to be the case considering his payment agreement with Little MM.

        Reply
        • Mr. Money Mustache July 22, 2019, 8:36 pm

          Yup, Chris is right in this case – I’d only create an LLC for YouTube – or anything else – if it started making a solid amount of money (at least $20k or so per year). So far it’s probably more like $3000, so it’ll be a while yet! :-)

          Reply
    • Andy Hough July 20, 2019, 2:03 pm

      Only earnings that the child uses for his or her own support are counted for the dependency support test. Thus, if the child earned $15k and put the $15k in savings the child would still pass the support test to be a dependency. Money put into savings is not money used for support.

      Reply
      • Juan July 20, 2019, 8:04 pm

        I see what you are saying and I don’t necessarily disagree.
        But putting myself in the shoes of a tough IRS agent, I’d make the argument that money is fungible and that it is debatable what money went into savings and what money is being used to support the child. Would the “savings” of the child be used for his own support in a year where there is a recession and the family business is not doing so well?
        A bit of a stretch, I know, just trying to make the point the point that this is not a slam dunk, and that more money the child makes, the more likely the IRS is to start asking questions.

        Reply
  • Anonymous July 20, 2019, 12:38 pm

    Roth IRA for minors maybe?

    Reply
  • Eric July 20, 2019, 1:06 pm

    Being an adult professional working in his father’s medical practice, I can attest to the potential heartache when things don’t go well. There is no amount of money that is worth damaging one’s relationship with loved ones. Go into these situations with eyes wide open!

    Reply
  • Willemijn Roozendaal July 20, 2019, 1:34 pm

    Isn’t it illegal for children to work in the States? In the Netherlands, where I come from, and I believe also in Europe working is only allowed as from 13 or 14 years, for only a couple of hours a month, and only during weekends or holidays.. Or do you mean kids from the age of 18?

    Reply
    • Mr. Money Mustache July 20, 2019, 2:08 pm

      In the US, the minimum official working age is 14 (according to the department of Labor), although the rules are more lax when it’s a family business. Thank goodness for that, because I’ve been working more than a few hours per week and earning money for it since at least age eleven! (my first paper route)

      Reply
    • Katy July 23, 2019, 2:12 pm

      One thing to consider is that child labor laws and mandatory education were at least in part to address issues of unemployment rates. In areas where the unemployment rate is generally high you don’t want a bunch of 10 year olds taking up all the jobs while they are a dependent, similarly it is in societies better interest that children have a longer formal education as that makes them more valuable in the labor force. Unfortunately in the US we still have a lot of jobs that are structured for minors yet companies are increasing less likely to hire those under 16 and many have made 18 their minimum.

      Reply
  • David July 20, 2019, 1:47 pm

    Great post, always new interesting content after so many years!

    My kids are a little young to hire now, but I have certainly looked into it as soon as they can “earn” some income. I think the “earned” income will be the limiting factor for what they (we on their behalf) could save in retirement. I have had the following question, but it’s so rare that I haven’t found a clear answer.

    If they only earn $5000 in a year, and they contribute all (or parents on their behalf) to a Roth 401k. That leaves them with $5000 in taxable earned income (because the contribution was all Roth). Then if you look at the rules for an Roth IRA, it seems as if you would be able to make that contribution (again parents with additional funds on child’s behalf) as well since the rules state taxable earned income (which they have). So due to the nature of Roth being taxable you could contribute 10k to retirement with only 5k earned.

    Any insight from Chris?
    I ran this as a trial Turbo Tax, and it was all “allowed”, and Bogelheads had a forum stating it was allowed. However obviously it seems like double dipping, but maybe just a loophole?

    Reply
    • Chris Care July 21, 2019, 8:18 pm

      This is an interesting question. My tax “quick references” don’t go into this, so I would have to research the actual code.
      My assumption would be that there is some kind of limitation that the total contribution to all retirement plans cannot exceed the amount of gross earnings. But again, this is just an assumption, and I haven’t dug into it at all.

      Reply
    • Steve July 28, 2019, 1:23 pm

      Yes, you can. If you trust the internet, https://obliviousinvestor.com/can-you-double-count-earnings-for-ira-and-401k-contributions/

      If you don’t trust the internet, read publication 590-A, especially table 1-1 and the explanatory text near it, to see that indeed form w-2 box 1 is taxable compensation for the purposes of IRA contribution limits, and that Roth 401k contributions do not affect that box.

      Reply
  • Cubert July 20, 2019, 2:07 pm

    Course, teach ‘em to work at too young an age, they may never want to retire. 😉

    Great advice here for tax avoidance strategies. I’m hopeful our kiddos will learn about real estate as paid property managelets, under the tutelage of pops Cubert!

    Reply
  • Michael Crosby July 20, 2019, 2:29 pm

    Just thinking out loud here:

    Imagine if investing in a child’s ROTH at a very early age at the max possible. Then use some of those funds to own a 4 unit apt bldg. Depreciation is no longer a write off, but all the income would be tax free for life, and would always have a place to live. And of course monies made trading stocks, whether short term or long terms, would suffer no short or long term cap gains.

    Seems to me, if able to do this hack from birth to 18, the child would be set for life.

    Reply
  • Greg July 20, 2019, 3:23 pm

    Yes we should employ our kids. Even if they don’t want to work with you when they grow older and find more interesting/fun jobs, the work ethic and skills they learn when they’re younger with you are priceless.

    Reply
  • Mighty Eyebrows Boy July 20, 2019, 3:33 pm

    Another great article.

    It looks like there are a couple unfinished “Thoughts” in the bullet list:

    – generational wealth / inequality / dynasties / buffett
    – effective altruism

    Perhaps material for another article?

    Reply
  • Jiri July 20, 2019, 4:48 pm

    I enjoy this post very much.
    Having tortured my kids from a young age with work, there are several other pros and cons to mention. I had restaurants during my kids middle, high school and college years.
    You get the opportunity to spend a lot of time with your kids which is mostly positive.
    In running a business you have to depend on yourself, this translates to your kids so no call outs or being late – be mindful to let them have their own quality time off.
    Teaching work ethic, ah yes: dad – why do you always yell at us the most, etc. Nobody else is going to invest the time to teach your kids good work ethic – they will fire them and replace them. (both of them have thanked me for teaching them good work ethic since which has helped them in life – I fell over and hit my head when that happened)
    They earn their own money and learn the value of it – wish I had done more with this one.
    The kids will learn a skill or trade that will last a lifetime.
    I’m sure I will think of many more and it was great.
    Make sure you hire them at a rate you pay others and be fair but demand hard work and excellence, it may be tough at times with ruffled feathers but pay off huge in the long run. I also think you build a stronger bond with them – of course you can not really put a price on this.

    Reply
  • Megan Russell July 20, 2019, 5:19 pm

    Your CPA is actually missing a really big opportunity here. There is actually a really awesome exception that will let your child have withholding-free, FICA-free, FUTA-free income that they can use to fund their Roth. I’ve written an article on it here: https://www.marottaonmoney.com/fund-your-childs-roth-with-chore-income/

    Basically, the same tax laws that makes the dreaded “nanny tax” also makes tax-free chore income for children. The rules to look for are “household employee” rules, but you can both read all about them in my article and find the links to the official IRS regulations on the matter. Hope this helps!

    Reply
    • Chris Care July 21, 2019, 8:22 pm

      I would be interested to see if there are any court cases or PLRs supporting this. I can see the IRS arguing that paying a child to do household chores that benefit the household in which the child lives is not a “trade or business.” We already know how strict the IRS is with hobby losses, I could see them taking a similar strict stance with this.
      It’s also not a major opportunity unless you have a business where you can write off these amounts. Without taking the wages as a business expense, you’re missing the main part of the tax strategy discussed in the article.
      To me, artificially creating wages merely to fund a Roth is a lot of jumping through hoops for relatively minor gain.

      Reply
  • Dharma Bum July 20, 2019, 6:15 pm

    My dad had a business, and from the age of 14 I worked for him every summer. I learned early on about the slog and drudgery of factory work. On your feet for 9 hours a day in a hot sweaty shop. I looked around and realized that the people who worked there had to do this for a living!
    It made me realize that I needed to do well enough in school to get a trade or some sort of marketable skill, so I wouldn’t have to spend my life doing hard hourly physical mindless labour the rest of my life.
    So, I guess that in itself was a good lesson, besides gaining an appreciation for those that do have to work their butts off in less than ideal environments, day in, day out, for 45 years or more.
    I ended up with an MBA, and my first job out of school was with his company.
    That was a mistake.
    I left after a few years and only got my first “real” job (i.e., on my own without any connections) when I was 29 years old.
    That’s when I really learned what it means to “work for strangers”. No breaks. No bullshit. Survival of the fittest. Political nightmare.
    Psychotic and sociopathic bosses. Crazy employees.
    I’d say that the only negative part of working for relatives is that it doesn’t develop the skill of actually looking for a job, and the necessary humiliation and stress that process entails.
    Otherwise, work is work.
    I always hated it, and that’s why I adopted the Mustachian lifestyle, and am a RETIRED happy dude today!
    Thanks MMM! 🤓

    Reply
  • Dharma Bum July 20, 2019, 6:27 pm

    By the way, if I had the opportunity to, I would definitely have employed my own kids. I never did have a business of my own, though. I channeled my energy into stressing the importance of learning marketable skills into my children, and constantly making them aware of what a shitty life it is in the corporate management world (and those are the GOOD jobs). Fortunately, I got through to them, and they ended up being professionals and entrepreneurs.
    THEN I retired.

    Reply
  • Luke Templin July 20, 2019, 6:39 pm

    Gusto is hands down better than ADP. Gusto is one of the best small business payroll solutions I have worked with as a CPA that uses all kinds of payroll software on a weekly basis.

    Reply
  • Emily July 21, 2019, 3:56 am

    Can someone please explain to me why MMM’s accountant said that 401k contributions add up quicker than IRA ones? Is it just the employee match of the 401k he’s referring to, or is there some other mathematical element I’m missing that makes a 401k the better choice? ” (since 401k contributions add up way faster than IRA contributions).” Thanks.

    Reply
    • Jesse July 21, 2019, 11:58 am

      My only thought is that the yearly contribution amount is higher with a 401k than an IRA. They are both the same as far as tax deferred growth, so that’s the only thing I can think of!

      Reply
      • Chris Care July 21, 2019, 8:25 pm

        Correct. 401k employee deferral limits are $19k (plus potential employer matching) for 2019. For the IRA, the limit is $6k. Obviously, this allows you to funnel 3 times as much into your 401k than your IRA (plus even more depending on how the employer matching portion is setup).

        Reply
  • Jeff July 21, 2019, 6:45 am

    I’d love to hear more about how you could/would structure the ideal small business with FIRE in mind. For example, 401k employee matching allows up to $56k in total contributions between employee and company. What’s the optimum way to max that out? Or does this not work for other tax implications?

    Reply
  • Financially Fit Mom July 21, 2019, 7:28 am

    ” as long as he remains motivated to work hard and be creative and keep producing.”

    Just curious, what if little MM’s attitude changes and he loses interest in the youtube channel and even working in general and wants to sit on the couch and eat bon bons instead? Would you convert to more of a traditional assigned chores with potential allowance type of situation or would you insist he maintain an output of work that would justify him as an employee of the business?

    Reply
  • FullTimeFinance July 21, 2019, 7:50 am

    Not a bad plan. I worry about the last balance point though. You have to allow kids to be kids. They are learning so much and doing so much at a young age. I wouldn’t want my kids to miss their child hood to work or even feel pushed to keep doing somethings long term they don’t enjoy. So I guess I would help my kids do a sort of side hustle if it interests them, but I wouldn’t push them very hard.

    Reply
  • Jesse July 21, 2019, 11:13 am

    I have an interesting thought experiment for Mustachians! Think of a business you could start that your kids could take over, that could be supported by the homes in a 2 mile biking radius. I’ll start: window washing, lawn mowing, home energy audits, painting, sprinkler backflow testing, pruning, powerwashing, water sprinkler maintenance…..all could be done with a bike trailer! Or for pros, start a popular YouTube channel ;-)

    Reply
  • PJH July 21, 2019, 1:43 pm

    “Hiring your children to work in your own small business”

    “Ask A Manager” has so many letters coming in on why this is not (normally) a good idea.

    If it’s worked for you, great!

    If it’s not worked for your kids and you haven’t picked up on this because they daren’t speak up, and still think it’s worked for you, that’s…

    not so great.

    Reply
  • Cathleen Cooks Stuff July 22, 2019, 10:45 am

    Wait…kids get PAID for working for t heir parent’s company?! Man, I lost out- my mom had us doing stuff for my dad’s office for years, unpaid! She was missing out on all that sweet tax reduction. Though, as soon as we got “real” jobs right before college, she was contributing to our ROTH IRA the max amount allowed per year. So there’s also that as a starting point- I was probably the only 19 year old with a ROTH IRA that actually had money in it (thanks, Mom!). No taxes on any of the gains, and by the time I was out of college, I could tap the contributions tax free as an emergency fund (but I didn’t). It’s a great option to stick some of that income for a kid who (probably) definitely qualifies under the income limit for a Roth IRA.

    Reply
  • Becca Niederkrom July 22, 2019, 6:01 pm

    Great post as always! I’ve been looking forward to your next post for weeks =) I had no idea that you started a Youtube channel; can’t wait to go watch. Congrats!

    Reply
  • Rob Dodsworth July 23, 2019, 12:42 am

    My eldest has asked to help me out by coming to photograph weddings with me, she already likes to help me edit my work (by this I mean she sits on my shoulder critically appraising the artistic merit, or not, of each one of my photos!). She’s not old enough to come along yet but she has a great work ethic. I’m keen to develop this in her but it’s just as important to build an awareness of taking time out to relax and play.

    Reply
  • Adam Reginald Reardon July 23, 2019, 2:53 am

    Nice post. I’d be interested to know how you monetized your YouTube channel and generated $1600 from 26000 subscribers. Maybe the subject of a future blog post? It sounds like a good way to generate passive income!

    Reply
    • Mr. Money Mustache July 23, 2019, 6:40 pm

      Yeah, we have both enjoyed learning about how YouTube creators earn a living from their channels – this has been a good portion of the joy of this experience. Interestingly enough, my son is the one who did most or all of the research and figured it all out.

      In summary, you just have to build up enough of a following to meet their threshold, then you check the “monetize my videos” box to get started. This opens up a whole new backend of YouTube to play around with. The revenue is VERY small on a per-view basis, but even a small number multiplied by hundreds of thousands can be a couple grand of income. And if you have millions of views, it becomes equivalent to a full-time income or more.

      Reply
  • David July 23, 2019, 5:07 am

    Make sure you establish clear rules in case of a break-up. Say, who owns the IP etc. You have enough money, so it might not matter, but making things clear will avoid disappointment and arguments later on.

    I’m also thinking about the too easy side of your graph. What if I give my kids a huge amount of money. Sure, they might end up spending it on cars and big houses, but maybe they will use it wisely and change the world. Too easy could also be solved by raising the bar instead of adding the same obstacles we already overcame.

    In the past hunting or farming skills where seen as essential skills for successful upbringing. Later maybe fighting or knowing Greek poetry. It is now assumed that earning money doing jobs is one of the most essential life skills, but what if it’s not. If I can assure them a modest lifestyle, they would be free to pursue something higher than just earning money. Making ends meet will indeed be easy, but there are much better goals like writing, art or social work.

    Reply
  • jcwords July 23, 2019, 7:17 am

    All of our boys have helped at one time or another with my business on a project or event basis. I’ve also hired one son to build and maintain a website on a contract basis, and that worked well. I enjoyed working with someone who understood my business and had an appropriately high level of competence in writing and graphic design as well as in programming. It was also handy to have quick access to tech support if anything went wrong.

    I recently had another son working with me during a period of under-employment, and just as I realized how good he was at the things I needed to have done, and how much I enjoyed working with him, he got a good job at a much higher rate than I could pay. That’s the only downside I can see to hiring family. This was my last available son, so I’m considering downsizing the business to what I can more easily handle it alone since I don’t believe I’d ever hire anyone outside the family.

    It does help that we are all calm introverts who like one another. We have no control freaks or yellers in the family, so that has made all the difference in how enjoyable it has been.

    Reply
  • Frank July 23, 2019, 12:35 pm

    I agree with most of the article and I also loved the earlier article on teaching kids about money.

    However- part of life and work includes learning that getting a job in the first place can be struggle and that you have to put in a lot of effort applying for jobs and polishing the cv.

    Perhaps if you give your kid a job you should make them apply for it as well? Or get them to send you a cv explaining why there the best person for that job!

    Reply
    • Mr. Money Mustache July 23, 2019, 6:36 pm

      oooo, interesting idea! It’s a bit late for that in my own household (and I’m not sure my son is obedient enough to play such a game anyway), but in general holding them to high standards seems like a great idea.

      Reply
    • Dharma Bum July 24, 2019, 6:16 am

      I made a similar point in my earlier comment, with respect to the “applying” for the job.
      In my experience, the hardest part of any job was actually going through the process of getting it in the first place.
      Resume writing, cold calling, following up, multiple interviewing, networking, etc. That is a stressful and humbling process.
      Once I got any job, the rest was a piece of cake.
      Until, of course, the boredom from the drudgery, and the disgust from the corporate world itself set in, and then early retirement became the ultimate goal!

      Reply
  • Mike July 23, 2019, 2:26 pm

    A potential drawback to consider: A child employed in the family business does not gain the experience of working for someone else. Early on (from, say 11 to 16 years), I think there is a huge benefit to doing real work for family. Be wary, however, of a child missing out on the experience of having a boss who is not family. I say this with first hand experience of having worked for family until I was about 16 and then moving on to other classic teenager jobs – both experiences were essential in making me successful in my career. On the other hand, I have two siblings who waited much later to “leave the nest” of working for family and have been severely handicapped in their ability to deal with very normal work stresses. My feel is that this would be a particular problem for anxious kids. All children and parents are different, of course.

    Reply
  • Ki July 23, 2019, 3:33 pm

    Dear Mr. MM, I have a specific question and I thought I might ask it here, and catch a few more eyes since this post in particular is likely to appeal to some post-FIers!

    Do you know of some good, supportive spaces online to hang out with, or connect with other FI people? I’ve been lucky to meet a few in person, but as we are currently a full-time traveling family, I’m yearning for something with a regular schedule and online. And served up in English!

    [Also I wanted to mention that your work was the key that helped us achieve our travel dreams – but I’ll save *that* gushing for later someday, in person, when we return to NoCo…]

    Ever grateful to you and this community,
    -Ki

    Reply
    • Mr. Money Mustache July 23, 2019, 6:32 pm

      Hello Ki, have you tried our own forum here at forum.mrmoneymustache.com? It has about 32,000 registered members and has been going for 6+ years. Also, I believe ChooseFI has forums too. And reddit’s “financialindependence” page.

      Reply
  • SkillfulWealth July 23, 2019, 5:11 pm

    Interesting strategy from many angles. I love the spending more time with your kids and life lessons as well as the tax strategy. Can you offer any suggestions or tips on documenting things properly? You mentioned the provider ADP and the newer one called Gusto. Is that expensive and/or time consuming? Initially it seems intimidating, but most things are until you are educated on the topic.

    Reply
  • James H July 23, 2019, 5:50 pm

    A few quick points:

    1 – Everyone needs to pay social security / medicare tax on 401k contributions (SS subject to annual cap).
    2 – Additional Potential Benefit – businesses can contribute to the 401k’s of their employees towards the $53k annual cap, as long as total 401k contributions are less than net earnings – so you could put more of the money to work for your kids on a tax deferred basis.
    3 – Additional fun note – if you are able to keep your 401k plan to a single participant (or married couple) you can file the 5500EZ form, which is much easier than the full 5500 form needed for multiple employees. Something to keep in mind that would favor more business entities.

    Reply
  • NavyChop July 23, 2019, 6:36 pm

    Some interesting figures and facts. But, what the hell? I started reading this blog from the beginning (about 4 months ago), and finally read this most recent article today. This is a major change that goes unexplained. Where is the “Wealthy Accountant”? I had to Google it to figure out one side of the story. There was an amazing amount of information in the beginning and for several years, but quality and trust has gone down significantly. If you look back at the trust article with Betterment; I have the same feeling with this blog.

    Reply
    • aceyou July 29, 2019, 9:35 pm

      MMM is certainly a different person than he was in 2011, and his blog reflects that, but that’s just the nature of life. I’m very different than I was in 2011, and thank goodness. You just got a condensed fast-forward of all those changes over a brief 4 month period. He still strikes me as completely genuine and honest and fundamentally the same awesome guy…just different as life has brought new things his way.

      Keep it up Pete, and thanks for everything you are providing to the community. My whole life trajectory(and that of my family and several of my friends) is vastly improved because of your contributions on this site. Thank you, and keep being you, wherever that takes you.

      Reply
    • Mr. Money Mustache August 2, 2019, 8:02 am

      Hi Navy,

      I decided to move to Care CPA because the Wealthy Accountant’s firm was getting too busy for me and I felt like a burden to them, asking for the extra time and personalized service I needed – that’s all the story there is for that.

      As for the blog quality – I’m sorry my current stuff doesn’t match your tastes, but I am glad you enjoyed the earlier articles.

      As a retired person, I get to choose what to write about, and I’m still happy with my recent work and relaxed schedule, because I think the writing was at the best of my abilities, and I’ve been spending my time on things more important to me – like raising my son!

      As for some feedback in the other direction – I’d encourage you to be nicer in your online comments and convert any overall criticisms into positive and specific requests, if you want to help people improve their work.

      Reply
  • veganomie July 29, 2019, 2:28 pm

    So glad I don’t have kids! You’re so right about the tendency of parents to spoil, although my father wasn’t and tended on the left side. That’s partly why I never wanted kids because I was made to feel like a financial burden almost every day.

    Reply
  • Simple Money Man July 30, 2019, 11:57 am

    I see a lot of benefits in this as you pointed out. The most important thing is for kids to learn the value of hard work and being responsible and accountable.

    Reply
  • B.C. Kowalski July 30, 2019, 6:16 pm

    I definitely grew up toward the left end of that spectrum and while my old man could be pretty harsh, I think I was better for it in the long run. Friends I’ve had whose parents veered way toward the right end of the spectrum don’t seem to be able to handle any kind of adversity. Many of them are drifting through life as if waiting for someone to come along with a magic solution for them. One got an inheritance and sits and watches TV all day, miserable and unable to grasp that he can change his own situation by walking outside. It’s frustrating to watch, and I’ve thanked my old man for not being soft on me. Although I do think he veered a little too far toward the harsh end of the spectrum, overall I’m glad he helped instill fortitude and the ability to solve my own problems (and he contributed a sense of frugality later enhanced by this blog.

    Reply
  • Andy Lindner July 31, 2019, 6:53 am

    I’ve not commented on the blog before – though I’ve been a long time reader/fan. I’ve been beating this drum for a long time to all my friends though and I just had to express appreciation for the topic. Many of my friends constantly say things like, “I’m doing this for my kids because I never got the chance… when I was growing up I had to do x, y, or z hard thing and it sucked – i’m not going to make my kids do that!” The problem is that I would argue that you, my friend, are a productive citizen, member of society, and generally successful in large part because you learned at a young age to accomplish hard things. You turned out well BECAUSE of those experiences, not IN SPITE of them. Don’t deny your kids the same opportunities to learn and grow….

    Reply
  • Becca Niederkrom August 8, 2019, 3:48 pm

    I’m such a fan of this website. And yes, let’s put kids to work.

    Reply
  • Fire Year FIRE escape August 13, 2019, 6:54 am

    Wow, I didn’t realize just how good these deals could be for the kids.

    One thing I plan to look into is when it makes sense to hire an accountant to cover all of these crazy techniques. Maybe you have an idea from your experience MMM?

    I don’t run anything under an LLC or have employees because CPAs cost a lot of money. At some point it’s worth it, but I’m not sure when :(?
    I also don’t like doing tax stuff so there is some value in just getting it off my hands someday.

    Reply
    • Mr. Money Mustache August 13, 2019, 4:34 pm

      Yes! My accountant Chris Care is accepting new clients as of this moment (August 2019). I find that accountants become worthwhile and pay for themselves as your income gets above $100k per year, as a very rough rule of thumb. Especially if your income comes from sources other than a traditional job.

      Reply
  • DP August 14, 2019, 9:34 pm

    First, I always liked Warren Buffett’s approach to leaving our kids money, where he says something like, “leave them enough so that they can do anything, but not enough so that they can do nothing.”

    Second, on the employment thing, I think I’d love to take my kid along with me for business trips to try to teach them the ins and outs of the business world. I think this would give them a huge head start over others and give them a taste of the real world. I’d be ok with them working for me for a bit but maybe not long term. I know of examples where much of a family works for a company and they have a bit of a sense of entitlement. I often wonder what they would be doing if their older generations didn’t work so hard making sure they had a place of employment so they could live very comfortable lives.

    Reply
  • Julie Sunday August 15, 2019, 8:07 am

    Great post. My own experience of working for my parents was less formal, but philosophically still very important–my dad had a small business (he published a newsletter and various books, and ran a small ‘bookstore’ out of our basement) and my brother and I regularly did tasks for him like labeling & stamping newsletters that hadn’t been processed by the mailing house, sending out packages, making buttons with our old manual badge-a-minit, and so on. While this was much more of a labor of love for my dad than any kind of big venture that could have had tax benefits for kids or been handed over to us at some point, teaching us that we had the choice to trade our time for money when we wanted to was extremely important. Our labor was always informal and very low pay (label and send these 175 newsletters and I’ll pay you .10 apiece or something along those lines) and never taxed or on payroll, the money was meaningful to us as kids to earn and spend how we liked. Now my husband and I have businesses where we work with adolescents and I cannot emphasize how important the value of learning that one’s time has monetary value is. We encounter parents (most of them very high income) who provide every opportunity to their kids, oodles of extracurriculars, none of which will ever amount to any kind of paid labor, ever. Hobbies that one enjoys are worth practicing and pursuing, of course, and a kid who is a champion at squash may enjoy it as an adult and find it worthwhile to continue. but to dedicate all of a child’s free time to improving at a skill that will never earn money, while not forcing them to engage in paid labor (even if the family doesn’t need the income), fails to teach them that their time has value that they can trade for cash. This lesson seems very difficult to instill in kids once they come to us as teens/college students who are, not surprisingly, failing to launch. My brother and I were making buttons and licking stamps as kids, then making copies and answering phones later on, typing up handwritten papers for other kids whose parents didn’t force them to learn to type, lifeguarding, and so on–and the specific skills aren’t as relevant as the lesson that your time can be exchanged for money. All of this is to say that even if you don’t have a ‘business’ that necessitates an LLC or tax filing, engaging your kids in paid labor (even chores for allowance) is still an incredibly helpful developmental benefit you can provide them starting at a very young age.

    Reply
  • John August 19, 2019, 6:49 pm

    I agree with you to some extent. It is helpful to employ your kids for their first job so they get to understand how to assume responsibility for their work product. However after your kids have worked for you for some time, it makes sense for you to push them to find another job.

    This helps them learn how to be independent and not always rely on the help or paycheck from their parents. It also exposes them to different work environments and types of jobs.

    Reply
  • RubeeToosday August 20, 2019, 11:33 am

    My view as an early, Gen-X retiree who had to do chores from age 5 , and had an outside job at 10, is be careful with demands on pre-teens. If they want to work because the money and experience gives them access to something meaningful, great, but over-emphasizing or making mandatory a job at a young age is a good way to put cd

    Reply
  • Stacy Mizrahi August 20, 2019, 1:52 pm

    When my child turned 7 I started the “3 jar” technique so that she could understand saving, and I’ve been giving her odd jobs with a defined payment. Mostly one-off chores but I make the distinction by routine. Vacuuming is an expected routine, you do it to help out. But if you want to make money, daddy needs the weeds pulled in the garden.

    She was a quick start and haggled right away. I think giving children some understanding of how they can create value isn’t bad as long as it’s balanced with play time.

    Reply
  • PLS September 2, 2019, 11:23 pm

    Hey MMM, a nice post for me considering I have a couple of kids a few years from starting work. One thing to consider, which I haven’t seen anyone talk about, is how these different scenarios for pay and retirement accounts affect a kid’s financial aid package for college. The FASFA, which is the federal financial aid application that most universities require, looks closely at the savings and income of both the parents and the child. Not all savings and incomes are weighted equally in their scoring. This means there could be some incentives or penalties depending on how you set up their savings plan. Not being a financial aid specialist, I’m unsure of the specifics but it is something to consider. Maybe your CPA has some insight?

    Also, keep in mind a college savings plan is a great way to minimize tax liabilities for college savings, but they have some restrictions. The biggest for me was the requirement that all the money must be spent on approved college expenses. This means a kid could not use the money if they didn’t attend college. I set up two college accounts for my kids, one a traditional college saving account and another Vanguard index fund. I get the tax benefits from one and the freedom to use as needed with the other.

    Reply
    • Aaron J Courtney October 10, 2019, 8:40 pm

      The problem with FAFSA is that it adds back in employee deferrals and all other tax deferred retirement account contributions into your income when it calculates expected family contribution (EFC). The only way to get around this problem is to have your business establish a defined benefit plan with an accelerated funding requirement period (due to early retirement age) beginning two years prior to the first child’s freshman year.

      The is the only real way (short of giving up income) to bury your AGI and potentially massively reduce your EFC (assuming you have also sheltered your savings).

      The contributions to the defined benefit plan don’t get added back into your income because those contributions never belonged to you as the employee. The funding of the plan is actually a liability of the business entity. And an actuary must attest annually that it meets funding requirements.

      Reply

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