Dry Cleaners’ Guide to Smart Business Structures and Family Employment (Application)
12 mins read

Dry Cleaners’ Guide to Smart Business Structures and Family Employment (Application)

NASHVILLE, Tenn. — While tax laws and regulations may seem confusing to those outside the industry, dry cleaning owners who pay attention to the rules of this particular game can save and gain a lot.

In her recent talk, “Tax Saving Strategies for 2024: Choosing the Right Entity and Hiring Your Children,” presenter Jamie Trull gave small business owners, like most dry cleaners, a few things to look out for (or not to look out for) when it comes to starting a business and keeping it cash flowing. The webinar was hosted by the National Federation of Independent Business (NFIB).

Trull is a former CFO of a Fortune 500 company and currently owns Balance CFO, where she is a financial education trainer and profit strategist. Part 1 in this series described the different types of business entities available to companies. In Part 2we delved into how these business structures and treatments can affect a company’s tax liability. Today, we’ll wrap up by looking at some of the benefits of hiring underage children—both for taxes today and for their future.

Hiring a child

Trull believes that hiring children to run the family business — especially those under the age of 18 — is one of the greatest benefits of owning your own business.

“This may be one of my favorite tax-saving opportunities,” Trull says, “and that’s because I take advantage of it too—it’s something I do personally. I hired my kids last year. They’re 10 and 7, and they were both on my payroll. They don’t make a lot, but they make enough.”

One benefit of this is that money that would otherwise be taxed at the parent’s tax rate is shifted to someone in what is likely a 0% tax bracket.

“If you pay them $14,600 a year or less — that’s the standard deduction for the year — they pay $0 in income taxes,” Trull says. “They’re completely exempt. And in most cases, they won’t even have to file a tax return unless they have other income they have to deduct.”

To do that, Trull emphasizes, the kids have to be on the payroll, with W-2 forms. “You don’t want to hire your kids as contractors,” she says. “It actually negates some of the tax benefits if you do that, and they have to file a tax return if they’re a contractor. It’s hard to defend being a contractor when your kid is 12—they can’t operate effectively and efficiently.”

The easiest type of business entity to take advantage of this type of employment is an LLC, because you don’t have to pay payroll taxes for the owner’s children. S corporations and other business entities can still take advantage of this tax law, but there are additional steps to take, which Trull mentioned later in her presentation.

Mathematics

Trull presented the following numbers to demonstrate the tax savings using the $14,600 figure mentioned earlier.

If the $14,600 is taxed normally, the tax liability, including income tax (25%, on the $3,650 amount) and self-employment tax (15.3%, on the $2,234 amount), is $5,884. If this amount is paid to a child, the money does not go to the IRS.

“If you only want to pay your kid $100 a month, that might not be worth it,” Trull says, “because again, we’re talking about payroll, and that has some costs associated with it. But if you’re planning on paying them a decent amount — at least a few thousand — it’s probably in your best interest to do that, as long as you set it up correctly.”

Education and Connecting

Trull says that beyond the tax savings, involving children in the family business has many other benefits.

“It’s giving kids responsibility in the business and helping them learn and manage money,” she says. “My 10- and 7-year-olds are on my payroll, and it’s been one of the best experiences, especially for my 10-year-old son, who really gets it and does more for the business. It’s been a great bonding experience, but it’s also a great way to teach kids about work, making money and what to do with money when you have it.”

Trull knows that paying a minor a salary of $14,600 seems excessive to most people.

“First of all, I don’t pay him that much,” she says. “And then you can pay for things like sports fees, camp fees with that money—whatever you pay for your child, you can pay for with that money.”

Parents can also set up a Roth IRA for their child with these funds, and Trull says this is where the real magic happens.

Wealth that changes generations

For Trull, setting up Roth IRA accounts for her children is a primary purpose for giving them contributions.

“That’s my favorite thing,” she says. “They both have custodial Roth IRAs that I contribute to. And you can only contribute to a Roth IRA if you have income from work.”

With a Roth IRA, the money is typically taxed when you put it in, but it is not taxed when you withdraw it after age 65. This means that the money grows tax-free, as long as certain conditions are met.

Parents can’t simply open a Roth IRA in their children’s names, Trull says. Instead, the money must be earned by the owner of the fund. However, if a parent is paying a child, they can open a custodial Roth IRA and deposit the child’s earnings into it.

“I can’t overstate the value of being able to invest money into this at a really young age,” Trull says. “You’re the best parent ever if you’re someone who does that, because you’re creating their future. You’re allowing compound interest to build for them.”

Trull gives the example of paying a child $7,000 (the maximum Roth contribution allowed in 2024) for nine years, for a total of $63,000. The expected rate of return, based on average S&P returns over 30 years, is 9%. The value of that Roth IRA at age 65, if the child makes no further contributions as an adult, would be $5,233,461.

“It’s tax-free when they contribute it (because they’re in 0% bracket as a minor), and the money grows tax-free in a Roth IRA,” Trull says. “You’re setting them up to create wealth for generations.”

This contribution is effective because children have on their side the most important element in compound interest: time.

“It’s an amazing, powerful tool that we, as business owners, can give our kids,” she says.

Finding positions for children

Trull cautions that one of the conditions of employing children in this way is that they actually have to do some work — it’s not a position you “can’t show up for.”

“They have to be actually employed and paid a fair wage for their work,” he says. “Documentation is key to backing up what they did and how much they were paid for it. I have a spreadsheet that I use that has all the details of what they worked, when they worked, how many hours, what role they played in the company, and how much they were paid for that role?”

Trull says it’s worth having this information on hand in the event of an audit.

“I have it all under control and I’m ready. If I ever get audited, no problem,” she says. “People think that hiring children is a red flag from the IRS. It’s not. But if If “researched, you want confirmation of how you calculated it.”

So what roles are suitable for children? Trull gave the following examples:

Administrative Assistant – Your child can help with a variety of administrative and organizational duties.

Graphic Design/Social Media – Depending on the age of your child, they may be able to do graphic design for you or manage your social media. “My son does light graphic design for my business,” Trull says. “He’s very good at Canva and can sit there and create graphics for my business. It’s crazy what these kids can do. They’re often much more tech-savvy than we are.”

Greeting Customers/Customer Service – If you have a physical location, your child can help greet or serve customers. “I work with a lot of people in the pet care industry,” Trull says as an example, “and there are so many things kids can do if you have a dog house. They can feed the dogs. They can play with the dogs. They can do a lot of different things. And all of those jobs are jobs that you can find.”

Model/Actor — If your child’s image or likeness is used for marketing purposes, you can pay for it. “This role can pay higher than some other roles,” Trull says. “It’s a big part of my kids’ paychecks when I take photos and use them in my marketing materials. My son has done YouTube videos with me, and I pay him for that. You can pay them by the project, not by the hour.”

Trull says that while children working in their parents’ businesses are exempt from some labor laws, some still apply.

“Children who work for their parents’ businesses can usually work at any age,” she says. “But the types of work and hours may still be restricted. Check your state and local laws.”

Children under 14 are not normally allowed to work, Trull says, but this is one of the exceptions that applies to businesses run by parents.

“Some employment laws apply specifically to things like unsafe work environments,” she says. “If they’re over 14, they can work for any company, including their grandparents or something like that. But under 14, it has to be a company owned by a parent to get that exemption.”

Family Management Company (FMC)

As mentioned earlier, single-owner LLCs can take advantage of the tax code by employing their children directly. Other business entities can do this as well, but there are a few additional hurdles to overcome.

Owners of businesses taxed as S corporations who have multiple owners, or grandparents who want to employ their grandchildren, may need to set up a family management company, or FMC.

FMC is basically another company that contracts with the children of the parent’s (or grandparent’s) company. The main family company pays FMC, and FMC pays the children.

“It’s an extra, extra layer,” Trull says. “It’s a pass-through company. It seems silly, but again, it allows you to take advantage of all the exemption benefits that you get for a family business, even if you have an entity structure that might not quite fit those rules and regulations.”

While this does introduce some extra complexity, Trull says it’s not all that difficult to create — and once you do, it can be worth the effort.

“Is it worth it for the tax benefits? Maybe? Is it worth it for what you can do for your child? I think definitely.”

To read Part 1 of this series, click HERE. To see part 2, click HERE.

(Graphics licensed by Ingram Image)