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University of Massachusetts Amherst

Family Business Center

Wanted: Hard Working, Responsible Son or Daughter of the Boss

by Jayne Pearl

Swamped with work even a kid could do? Why not hire your kids to do it?

If you are a sole proprietor (14.9 million people, or 11.5 percent of the labor force, were self-employed in 1997), putting kids on the payroll is great for the business-owner parent. The business gets to deduct reasonable salaries paid to dependent children under age 18. Sole proprietors in the top 28 percent federal tax bracket will save at least 43 cents (28 cents from deducted salary and 15 cents from reduced self-employment taxes) in federal taxes on each dollar, up to $4,300 (in 1999) they pay their children. There is also a reduction in state taxes.

Children under age 18 can earn 1999 wage income up to $4,300 tax-free. Sole proprietors do not have to withhold Social Security taxes or unemployment taxes for kids unde 17 on their payroll. This does not apply to shareholders of a closely held corporation or partnership.

Besides the tax write-off, hiring your children provides an opportunity to teach them something about the work ethic and to give them valuable skills.

But before you ask your kids to fill out a W-2 form, consider that your best intentions can backfire. Parent-child power plays and occasional tantrums can wreak havoc in the office. Your kids could become a distraction to other employees. To make sure a parent-child working relationship will be a rewarding experience-for you, your children and other employees-read on.

Assign the right job for the right age.

You need to spell out what tasks you require your children to complete in a given amount of time. Make sure those tasks match their skill level. You don't want them to get frustrated and lose confidence if you give them work that is over their head; or to get bored if they are working way below their abilities.

Ron Cooper, co-owner with his brother, Richard, of Coopers Dairyland of Northampton, Inc., employes both his daughters, Heather, 17, and Emily, 16. They each started working summers after they turned 14, and when they turned 15, they began working after school and weekends. Their initial jobs entailed stocking shelves and maintenance, for which they earned minimum wage, the same as all new employees. They learned what to stock and when, and the procedures for doing it properly. Later Cooper promoted them to the cash register, where they had to learn how to handle money and deal with customers. "At first Heather was shy and naive, but now she gets herself up in the morning, counts money and once a week opens the store at 5:30 a.m. to give my brother and I a day off."

Twins Frank and Michael Roberts, 16, both work for their father, Seth, co-owner of Springfield-based F.L. Roberts & Co., which owns 35 gas stations, 13 car washes, four quick lube stations and a handful of motels and laundromats. Seth notes, "Both started working at a car wash last summer. A couple summers before, they'd done a little maintenance: painting and sweeping. Their brother, Eric, 12, sometimes shreds paper in the office. Mike didn't like it. He came home and told my wife, 'I never said 'ain't' before and that's what these people are making me do.' He prefers to work in the office filing and record-keeping. Frank liked it. My goal is to expose them to work. Regardless of what they want to do in life, they will learn how to work with people, how to follow orders and take instructions. I also want them to get an idea of what they want to do in life-what their goals might be and how education can shape their lives a bit."

Set reasonable work hours.

You also need to specify how many hours you expect your kids to work. Some states exempt business owners who hire their children from abiding by the federal child labor law, which stipulates that children cannot begin working until age 11. Massachusetts, however, is not one of those states (except for children working on family farms). During the school year, the law says kids 11 through 15 can log in up to three hours a day between 7 a.m. and 7 p.m. and up to 9 p.m. when school's out. There are no restrictions on children 16 or older, except for occupations considered hazardous. Make sure to check that the hours and type of work you assign your children meet both state and federal laws.

Also remember that kids need time to pursue other activities, such as sports and music, and also need unstructured time wih their peers.

Cooper's older daughter, Heather, works about 20 hours a week during the school year, but Emily only logs in six or seven hours a week, to make time for sports. "I want them to have enough time to do their homework, but not enough to sit home watching TV," says Cooper.

Kara Grenier, 16, works 40 hours a week for Grenier Photography, a children's and school photography studio owned by her father, Dan and his three brothers and one sister (CHECK). She is the studio assistant who greets and escorts, checks out their outfits and suggests different outfits and rooms, and sees that the flow of students within the studio is moving at a timely pace. During the school year she doesn't work at all, so she can have time for extracurricular activities.

Pay fair wages.

Many business owners make one of two mistakes: they either overpay or underpay their kids. Instead, pay them what you would have to pay other employees to perform similar work.

"If compensation bears no reasonable relationship with services rendered," warns Ron Weiss, a partner at Bulkley, Richardson and Gelinas, LLP, "you're in danger of dividend treatment to the parent and/or gift to the child by the parent." For instance, Weiss explains that if a parent pays a 12-year-old child $10,000 a year just for filing a couple hours a week, that would come to $100 an hour ($100 x 100 hours = $10,000). "If you're a corporation looking for the deduction, the corporation would not get the full amount. If a reasonable pay was, instead, $10 an hour ($1,000 a year), anything paid in excess-in this case, $9,000-would be considered a dividend to the parent, not the child, and there is no deduction. The parent is then deemed to have made a gift to the child in the amount of the dividend. So the parent would pay income taxes at his rate, the corporation wold get no tax bendefit on the excess, and there may be a gift tax."

Weiss notes that for limited liability corporations (LLCs) and partnerships, "the concept of dividend and deductibility means less. To the extent the excess is not compensation, it's just taxed directly to the partners, but they have the same gift issue."

But should you pay your 12-year-old computer wiz the same $50 an hour (or more) you might have to pay a professional to write a complex software program for your business? No, says money psychologist Olivia Mellan, based in Washington, D.C. "You should factor in a combination of their age and what feels right to them. You shouldn't pay thme more than what feels like a good salary to them. Having a lot of money can feel weird, not great, to a kid."

Greneir, Cooper and Roberts pay their children just what they would pay other employees doing similar work: between $6 and $6.50 per hour.

Build in some rules and responsibilities for how they can spend their wages.

Too high a salary can also usher in what University of Michigan professor Jerald G. Bachman as "premature affluence," in which kids whose cash is all disposable develop unrealistic expectations and spending habits. By the time they're out on their own and have to pay their own rent, utilities and food, they can become overwhelmed and unprepared to live within a budget. The decline in their standard of living can make it hard for them to adjust to real-world financial demands.

Bachman also warns that teens with significant sums of discretionary money are also more likely to get involved with alcohol and other drugs, "as well as automobiles which increase mobility, relative isolation from adults, and accompanying risks." To avoid these problems, Bachman recommends that parents try to limit working teens' casual spending, charge them some room and board, their own car and entertainment costs, and perhaps require them to save more than the average teen does for future needs.

None of the families interviewed for this article required their children to cover any expenses except for car maintenance and gas. "We don't require Heather and Emily to pay for their own stuff, but once they started earning money, they wanted to," says Cooper.

Dan Grenier says Kara saved most of what she earned last year to go to Spain. "I would have paid for her to go, but she wanted to do it."

Teach on the job.

There's nothing wrong with hiring kids to sweep the office, answer phones or do filing, but it's important to explain how any tasks they perform contribute to the business.

Work experience not only keeps kids off the street, it can also provide them with important life lessons, such as skills, discipline, how to get along wih superiors and peers, how to cope with a tedious routine, and a greater understanding of adults who must put up with jobs all the time.

But watch out for some potential problems. For instance, with fewer hours to do homework, grades may slip-be prepared to adjust their hours. Be sure to monitor your teens' pressure and stress. Homework, household chores, sports, music lessons and practicing, religious school, and clubs already leave kids with precious little leisure time. Also make sure your kids get sufficient sleep, nutritious food, exercise and time to just veg out and relax.

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