There's A Sneaky Reason Why Millionaires Hire Their Kids

Americans have plenty of financial tools available to them when seeking to get ahead. Frugal spenders might opt to buy in bulk whenever they can to reduce the overall cost of essential items, while rewards card users funnel all their spending through a particular credit card (and pay it back every month). No matter where you find yourself on the economic totem pole, there are at least a few opportunities out there to help you stretch your dollars just a little further.

But when it comes to the richest among us, a whole world of possibilities often open up in front of them. Tax deductions are often easier to come by for those who have more means, and other financial workarounds can be found in greater abundance to help keep more money in the pockets of the wealthiest individuals. One such tool that millionaires frequently fall back on involves their children. Fortunately for those added players on this economic game board, leveraging your children in your business enterprise can actually be beneficial to both the owner and their young ones. Here's why millionaires in America often look to hire their children to perform jobs around their companies, and how they make this financial tool work for everyone involved.

In 2021 there were over 834,000 sole proprietorships and nearly 4.5 million partnerships in operation. Both of these small business types have a unique advantage when it comes to hiring family members. Children under 18 can work at a family business without the organization having to pay the combined 7.65% FICA taxes (Social Security and Medicare taxes) that the business would otherwise be on the hook to cover. In regular employment arrangements, the company pays 7.65% in FICA taxes, and the employee also pays the same, coming together to cover the obligation to Uncle Sam. But some employment arrangements involving family members can be exempted from this necessity. Spouses and children under 21 (as well as parents in some instances) are exempted from this requirement when working as household employees.

Out in the wider world of business, children who are old enough to work but haven't yet turned 18 can provide crucial manpower to help drive business forward while reducing the tax burden that the organization must pay. Millionaires hire their children to conduct routine business operations as a cost cutting measure, as a result, on top of all the other benefits that this brings to both the business and the child employee.

Income you pay to employees is generally an expense that can be deducted from your ongoing tally of business finances. Deductions help reduce the burden that a business must shoulder come tax day. This opens up a unique avenue for dual-purpose financial management when it comes to children. Parents are constantly paying for their children to participate in activities and events, they purchase clothing and other goods, and feed them on a daily basis. The cost to raise a child has risen precipitously in recent years, ballooning to over $300,000 by some estimates. Millionaires who own their own business can utilize the company's books to turn the tide on this financial demand, however.

Hiring your own child allows you to pay them for work they do. Theoretically, this might act as a replacement for an allowance, of sorts. A business owner might opt to pay their child and then give them responsibility over buying certain expenses that they need like clothing and entertainment. Salary payments that remain under $14,600 for the year aren't taxable (in 2024). More to the point, your child won't need to file taxes at all as long as they earn less than this threshold. That salary payment is made tax-free and can replace some of the funding for their lifestyle that would otherwise be taxable through a parent's income figure. This money can then be used as a deduction on the business' books, reducing the total tax burden of the effort even further.

The tax-free income a child receives from work done at their parent's business (as long as it remains beneath the threshold) isn't always primarily a tax loophole. Working at a parent's business is a great way to develop critical skills while performing a legitimate role in the company. Many young people aspire to join their parent in the working world when they are old enough, carrying a passion for their family business all on their own. A family enterprise allows a child to gain entry to the working world without the enormous struggle that others face as they look to gain experience. Many people find themselves stuck in unpaid internships and other lackluster working arrangements in order to get their foot in the door. Instead, the child of a wealthy business owner often just has to ask their parent for a job doing anything of value that might be needed.

Even if the particular line of work their parent is in doesn't form a passion for the child, experience in an office or any other entrepreneurial setting can be immensely valuable. Earning a salary gives them financial independence that others won't have nearly as much access to, and real world experience in the working world sets them up for greater success as they search for their next job. The benefits of getting into the job market early on in life are tremendous, and a parent that can open this door for their child provides a massive leg up that may just last a lifetime.