Perhaps you retired from your career. Now you have gone on and started and set up your own small business. This business could be a service business related to what you did during your working career.
Things are going well. In fact, some days, too well. You are working far more than you planned at this station in life. Face it, you need help. You are starting to realize Why Getting Old is the New Normal.
If the fact pattern below plays out accordingly, you should consider employing your grandchildren. While this post is addressing how you can employ your grandchildren, it is equally applicable to parents hiring their children.
Before we get into the weeds, you need to understand:
- You need to have work for your grandchildren.
- They need to do the work.
- You need to pay them reasonable compensation.
- You need to maintain meticulous records.
If any one of these does not apply to you, do not proceed with even reading the rest of this blog post.
Like the board game Monopoly, the rules are not optional. If you miss any of the requirements like real work, reasonable pay and detailed record keeping you could draw the “Go to Jail” card. In tax terms this means, do not pass Go and do not collect the tax savings.
If you are considering this approach, the basic fact pattern is as follows:
First, you need to have an unincorporated business. An unincorporated business could be a sole proprietorship. While we do not practice law, as a practical matter, a sole proprietorship is not recommended. This is because the sole proprietor has unlimited liability.
Not the place you want to be.
Another unincorporated business is a limited liability company (LLC). Check with your attorney to see if this is appropriate for you.
If you have a corporation, this is not considered an unincorporated business. Therefore, this strategy we are addressing here would not apply to you.
Second, if you do not already have one, you would need to obtain a federal tax identification number. This is straightforward. Go to Get an Employer Identification Number.
If you are in Connecticut, you would also need to register with The Department of Revenue Services and the Department of Labor.
Third, if you are a Connecticut employer, you will need to obtain a workers compensation policy for your employees. This policy provides medical coverage for work-related injuries or occupational illnesses.
Fourth, while there is no cap on the age of any grandchild you can employ, the most efficient tax outcome is if they are under age 18.
What Are The Tax Benefits of Hiring Your Grandchildren?
First, if you have an unincorporated business, and your grandchild is under age 18, the wages paid to them are not subject to Social Security and Medicare Taxes. Normally both the employer and the employee pay Social Security and Medicare Taxes. The rate for these two combined taxes is 7.65%. This rate is paid by both the employer and employee making the total tax 15.3%.
Second, in 2026, the Standard Deduction for a single filer is $16,100. This means that if the grandchild earns less than this amount, they will not owe any income tax.
Third, this is not to suggest that you should not hire your grandchildren that are age 18 or older. You certainly can. It is just that now these wages are subject to the Social Security and Medicare taxes mentioned above.
What Do You Need to be Eligible for a Roth IRA?
Now that your grandchild has earned income, they are eligible for a Roth IRA. If they have wages from working for you, they can contribute to a Roth IRA. In 2026, the maximum Roth IRA for taxpayers under age 50 is $7,500. They can contribute what they earned for wages, not to exceed this $7,500.
Contributions to the Roth IRA are not income tax deductible. Said differently, you are making contributions with after-tax dollars. It is important to understand IRA versus Roth IRA. What you need to know.
If your grandchildren have little to no additional income, they will not owe income taxes. Therefore, you are contributing to the Roth IRA when the tax bracket is zero.
Sign me up for that!
The main benefit to the Roth IRA is, down the road, getting tax-free distributions. For Roth IRA contributions, there are only two simple criteria to have the distributions be tax-free.
- The distribution needs to be made to the Roth IRA owner after age 59 ½.
- The Roth IRA account needs to be open for at least five years.
That is, it.
Imagine all those years of tax-free growth. Not tax-deferred growth like a traditional IRA or a 401(k)-plan distribution.
No Required Minimum Distribution (RMD)
The other benefit to a Roth IRA is that it is not subject to the RMD rules. Currently, these rules require that investors in traditional IRA’s or a 401(k) plan must begin withdrawing from these accounts at age 73. This age will increase to age 75 starting January 1, 2033.
The IRS uses a life expectancy table. The RMD starts out at about 4% of the value from the prior December 31st and then the percentage increases annually.
Here are 3 Easy Reasons to Open a Roth IRA.
Why Do You Need to Hire a Payroll Company?
If you are considering employing your grandchildren, and do not currently have any other employees, we would recommend you engage a payroll company to service your needs.
The payroll laws and forms are complicated and are constantly changing. You do not have the time to keep up with this. Even if you had the time, if you failed to deposit the taxes timely and / or did not file the tax forms timely, the penalty and interest associated with this is brutal.
If you do not engage one of the several large publicly traded companies that offer payroll, be cautious. These large publicly traded companies have significant oversight, including audits and bonding. There is an entire cottage industry of smaller payroll companies that may or may not have this oversight.
As an employer, you are deemed to be a responsible party in the eyes of the IRS. This means that if the withholding taxes have not been remitted, for whatever reason, you are 100% liable for the funds that were withheld. Repeat:
100% liable….
So, care and diligence will need to be exercised to see that, in fact, all the taxes have been paid, and all the forms have been filed timely.
Practical Matters
Do not even consider this strategy if the job for your grandchild is a no-show job. In addition to the wages being disallowed as an income tax deduction, you are more than sending the wrong message to your grandchild.
What work will your grandchildren do? Even in today’s alleged ‘paperless office’ there still seems to be enough paper. This requires opening mail, filing, scanning, and shredding. There is also office cleaning required. And do not forget, a grandchild that is 16-17 years old has forgotten more about technology than you ever knew. Put them in their sweet spot and get them working on your social media outreach and becoming your Artificial Intelligence (AI) assistant to help you in a human way.
There are lots of rules that need to be followed to be able to defend that any grandchildren you employ are, in fact, employees.
The wages paid need to be for legitimate work that was done. Additionally, the compensation paid needs to be a reasonable wage.
Additionally, many states have child labor laws. These can address what age the child needs to be, the number of work hours allowed and the work environment. Caution needs to be exercised so you stay compliant with these rules.
As the employer, along with all the quarterly and annual payroll tax reporting forms, you will be required to issue a W-2 to your grandchildren for their wages earned. This will require your grandchildren to file an income tax return if any federal or state income tax was withheld. In many cases, they are filing the tax return solely to get the refund.
One Potential Pitfall
The benefits highlighted here are great. Having said that, caution needs to be exercised if obtaining financial aid for the grandchild is a possibility, the caution flag needs to come out.
The good news is, the Roth IRA is an excluded asset for both the parents and child for purposes of the Free Application for Federal Student Aid (FAFSA).
However, for the Student Aid Index (SAI) you need to be careful. The SAI is the new term that the Education Department recently put on it. You may remember this as Expected Family Contribution (EFC). This was part of the FAFSA Simplification Act.
The parent’s income is assessed (after allowances) at 22%-47%. However, a child’s income is assessed (after a currently $7,600 allowance) of 50%. Clearly you are going to need to run the numbers if financial aid is on the table.
The Biggest Benefits
Do not misunderstand me, the tax benefits mentioned above are great. Contributing to Roth IRA when you are a younger teenager is awesome.
However, the biggest benefit is the ability to work with your grandchildren. You get to teach them:
- Work Ethic
- Skills
- Money Management
- Your Values
Give it time and you may find this experience was priceless for you and your grandchildren.
Conclusion
This strategy may be especially relevant for business owners in Connecticut who are looking for practical ways to reduce taxes while involving family members in their business.
If you need help with 3 Practical Reasons to Hire Your Grandchildren in Your Business, call Thomas F. Scanlon, CFP®, CPA (currently not practicing), serving clients in Manchester, Connecticut and surrounding communities, at (860) 645-1515 or E-Mail Thomas.scanlon@raymondjams.com
This is original content written by Thomas F. Scanlon, CFP®, CPA(currently not practicing), a financial advisor in Manchester, Connecticut.
Image generated using artificial intelligence.
Changes in tax laws or regulations may occur at any time and could substantially impact your situation. While familiar with the tax provisions of the issues presented herein, Raymond James Financial Advisors are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. Investing involves risk and investors may incur a profit or a loss.
Contributions to a traditional IRA may be tax-deductible depending on the taxpayer’s income, tax filing status, and other factors. Withdrawal of pre-tax contributions and / or earnings will be subject to ordinary income tax and, if taken prior to age 59 ½, may be subject to a10% federal tax penalty.
Like traditional IRA’s, contribution limits may apply to Roth IRA. In addition, with a Roth IRA, your allowable contribution may be reduced or eliminated if your annual income exceeds certain limits. Contributions to a Roth IRA are never tax deductible, but if certain conditions are met, distributions will be completely income tax free. Roth IRA owners must be 59 1/2 or older and have held the IRA for five years before tax-free withdrawals are permitted.