Discover how Family Management Companies and Hiring Your Kids works
A Family Management Company (FMC) serves as a vehicle to manage family assets and investments and can be used to employ family members, including children, under IRS-compliant conditions.
Hiring your children within an FMC not only provides them with valuable work experience but also offers tax advantages such as shifting income to lower tax brackets and taking deductions for legitimate business expenses.
Required documents
To properly establish and operate an FMC and hire your children, you will need:
- Formal employment contracts specifying roles and responsibilities.
- Accurate payroll records to substantiate compensation.
- Documentation proving the business necessity of their roles and compliance with labor laws.
Benefits of Family Management Companies and Hiring Your Kids
- Tax Efficiency: Proper structuring allows for income splitting that can lower the family’s overall tax burden.
- Skill Development: Provides family members, especially young ones, the opportunity to gain practical business experience.
- Asset Management: Helps in planning and managing family wealth with a structured approach to asset oversight.
Steps to Implement Your Family Management Company
- Define Business Goals: Clearly outline the objectives of the FMC and how family members will contribute.
- Legal Setup: Establish the FMC with proper legal frameworks to manage assets and employ family members.
- Educate and Train: Provide training for family members to ensure they understand their roles and the expectations involved.
Important considerations
Employing your children in a Family Management Company can provide both tax benefits and valuable work experience for them. However, it is essential to follow IRS guidelines to ensure compliance.
IRS Guidelines for Hiring Family Members
- Reasonable Compensation: Pay your children a reasonable wage for the work they perform. The compensation should be comparable to what you would pay a non-family member for similar work.
- Document Work Performed: Keep detailed records of the work performed by your children, including job descriptions, hours worked, and tasks completed.
- Employment Taxes: Depending on the age of your children and the type of work they perform, you may need to withhold and pay employment taxes. Refer to IRS guidelines for specific requirements.
For more detailed information, please refer to the IRS guidelines on Family Employees.