As a real estate investor and landlord, you’re always looking for ways to cut costs, improve the bottom line, and increase your ROI.
As a parent, you’re always looking for ways to teach your children about financial discipline and responsibility so that they mature into wise adults.
What if you could combine these objectives and see benefits in both areas? Depending on the circumstances and ages of your children, you might be able to hire them to help you manage your Houston rental properties and enjoy some nice financial incentives as a result.
Why You Should Consider Hiring Your Children
There are a number of compelling reasons to hire your children to work for you, including:
- Tax benefits. The number one financial benefit of hiring your kids is that it allows you to reduce your taxes. Children under 18 who are employed in a family business are not subject to Medicare taxes or Social Security taxes (as long as the business structure is a sole proprietorship or a limited partnership where the parents of the child are the only partners). You’re able to deduct the salary you pay your child from the business income, which reduces your income taxes. The amount the child is taxed at is then reported at the child’s rate. And as long as you keep their income under the standard deduction amount, they won’t owe any taxes. This strategy not only provides significant tax benefits but also eliminates the need to withhold income tax or self-employment tax from your child’s earnings. Additionally, by paying your child and reporting it on their own tax return, you further reduce your business’s taxable income. (More on this later.)
- Wealth transfer. If you’re looking to transfer wealth to your children with limited tax repercussions, hiring a child gives you additional ways to put money into IRAs, 401ks, or college savings plans without incurring gift or estate taxes.
- Personal development. So far, we’ve just focused on the financial benefits. But there’s a very practical personal development piece to all of this. When you hire your children to help you with your properties, they develop real-world skills. This includes problem-solving, financial literacy, goal-setting, communication, etc. This helps tremendously as they mature.
- Frees up your time. As your children get older, they become more capable of doing tasks well. Even if it’s just organizing files or doing some simple paperwork, it’s helpful. When a child is able to do 5-10 hours of work per week, that’s 5-10 fewer hours you have to work. That’s a win for the entire family!
- Succession planning. As your children enter their late teen years, you may begin thinking about succession planning for your real estate business and portfolio. By hiring them now, you can gauge their interest level and help them gain some experience. If they really enjoy the work and show some promise, you can get a jumpstart on your succession planning.
How Much Should You Pay Your Children?
This is a question that gets asked a lot. While the IRS allows you to pay your children for legitimate work and lower your Federal income tax, there are some common sense rules and requirements to keep in mind.
First, your children need to be at least 7 years old to consider this strategy. And, the older they are, the less likely it is that the IRS will question what you’re doing. You also need to pay them a reasonable salary – meaning the same amount you would pay someone if they weren’t in your family.
For example, if you would hire a stranger for $15 per hour to answer emails for you, it’s not reasonable to assume you would pay your child $100 per hour. That’s going to raise some red flags. Always keep the salary in line with a normal expected pay range.
While there technically aren’t any rules to how much you can pay your children per year, there are some limits you’ll want to keep in mind. For one, the standard deduction amount for single individuals is $13,850. That means a child can make up to that amount and not owe any Federal income taxes.
However, you could also open up an IRA or 401k for your child and combine the annual contribution with the $13,850 to effectively increase how much you can pay per child without incurring any taxable income on their part.
All of this can get a little complicated, so you’ll want to consult with a CPA to learn more about how much you can/should pay to make sure you’re maximizing tax savings and playing within the rules.
Best Practices for Hiring Your Children
If you’re going to hire your children to help you manage your Houston rental properties, there are some best practices to keep in mind:
- Only hire your child for legitimate and age-appropriate work. For example, you can’t try to claim that your 7-year-old child writes marketing content for your website when he or she can’t even read very well. It needs to be work that they’re actually legitimately doing.
- Always maintain proper documentation. This includes timesheets of when and how much they’ve worked. You should also make payments on a regular basis into a separate checking account that’s in the name of the child.
- If you’re going to hire your children and pay them for work, make sure you also take the time to teach them how to be financially responsible. Sit down with them and show them how to read their pay statement. Help them build out their own monthly budget with categories for saving, spending, investments, and generosity.
Very few parents are ever in a situation where they’re able to hire their children and teach them work ethics and financial responsibility. If you’re in a place to do this – and you also get to benefit from tax savings – it’s a no-brainer! Just make sure you consult with a CPA to figure out all of the nitty-gritty details.
Green Residential: Houston Property Management
Your kids can do certain tasks for you, and even provide a nice little tax break for your business, but they’re no replacement for having a trained and skilled Houston property manager on your team. Make sure you’re covering all of your bases by partnering with the right professionals.
At Green Residential, we take Houston property management seriously. We’ve been in the industry longer than just about any other real estate company in the area, and would love to partner with you. Contact us today for a free property analysis!
Tiffany is the Director of Operations at Green Residential.She has been in the multifamily property management industry for 7 years, serving most recently as an Area Manager in Nashville, TN. Tiffany specializes in all aspects of the property management process.
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