Kids Earn a Little Extra on the Job
A summer vacation spent packing boxes or filing in the family business can benefit the teenage daughter or son of the boss, as well as the company, beyond keeping the kids off the street and providing the business with a cheap temporary worker.
Barry Porteous, president of Porteous Fastener Co. of Carson, credits summers spent as a teenager working in his father’s warehouse for his decision to return to the family business after almost a decade away.
Those early years and the close working relationships he developed with the other employees, many still with the company, contributed to a sense of ownership that helped woo him back at age 29 when his father was thinking of selling the company.
“I didn’t come into this business with a silver spoon in my mouth. I came in with a broom in my hand,” said Porteous, 50, who oversees the growing wholesale distribution company’s 420 employees and 14 branch locations.
Although the business is more complicated than when a teenage Porteous was allowed to drive a forklift, Porteous hopes the family’s third generation, including his own son and daughter, now 14 and 12, spend time in the business, even if they decide to pursue a career elsewhere.
“Part of it is teaching the children the responsibility of what ownership of a business means and the responsibility you have to your employees, the community and to your customers,” Porteous said.
Hiring one’s children under the age of 18 can be attractive to a family business on several other fronts. It can serve as a way to keep assets within the family and, thanks to potential tax breaks and deductions, can save the family money.
“I’ve made that recommendation to clients myself,” said Gary Boudreau, tax partner at Deloitte & Touche’s Costa Mesa office.
In addition to keeping the kids busy and providing them with some spending money, a job in the family business can help fund college expenses at a cheaper rate, he said.
That’s because a child is likely to be in a lower tax bracket than the parents. So if the family needs to earn money to cover college expenses, it makes sense to have the kids earn the money rather than the parents.
There is a catch, Boudreau said. As much as a business owner may take pride in an offspring’s skills, the Internal Revenue Service will not look kindly on a 16-year-old’s earning $100 an hour to push a broom.
“There could be very negative tax consequences if the parents aren’t very careful about really treating their children at arm’s length,” Boudreau said. That means paying them a rate that makes sense for the job.
At Porteous Fasteners, that was never a problem. Porteous, whose younger brother works at the company as vice president of marketing, said he and his siblings earned minimum wage, about $1.25 an hour at the time. He plans to pay his own children minimum wage when they start out.
Those wages are deductible for the family business, as are most employees’ wages. The benefit to hiring a minor child of the owner is that theoretically the money stays in the family.
The family business owner pays the wage and takes a deduction, but the money ends up back in the family’s pocket.
That can be tempting to unscrupulous parents. Tax experts warn that not only does the wage have to roughly match the job description, the child must perform the work.
“In many cases, people do it literally to get a deduction for paying the kid’s allowance,” said Philip Strauss, tax partner in Grant Thornton’s Los Angeles office. “You can’t do that. They are playing the audit lottery.”
If their number comes up at the IRS, the company may have to pay the unpaid taxes plus a penalty. Although the IRS doesn’t keep track of such cases, tax experts have no doubt they exist.
“Let’s face it, in a closely held business the level of scrutiny is not as high as in a public company,” Strauss said.
If the family business is a sole proprietorship or a partnership in which both parents are partners, the family qualifies for several other tax breaks.
The business does not have to pay federal unemployment tax on the wages it pays the owner’s children who are under 21. If the child is under 18, the family business doesn’t have to pay state unemployment tax or state disability insurance on the child’s wages.
Wages a family business owner pays to his or her children under 18 are also free from Social Security and Medicare taxes.
These tax breaks don’t apply if the family business is incorporated, even if the parent controls the corporation. That’s the case with the Porteous Fastener Co.
*
For Porteous, the chance to instill a work ethic and a sense of ownership are more important than tax benefits when it comes to hiring his kids.
“We have a family philosophy and plan of at least allowing for a continuation of ownership down to the third generation,” he said. “So we are hoping that [the children] will take over the business and keep it going for the benefit of the family.”
*
Has your family business solved a special challenge? We’d like to hear about it. Write to: Family Business, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles,
CA 90053. Or send e-mail to cyndia.zwahlen@latimes.com.
