Make It a Family Affair: How Landlords Can Employ Children for Tax Breaks

As landlords we often can use an extra hand around our rental properties so why not employ your children or grandchildren to get some of those items off your To-Do list?   I suggest you speak with your CPA to validate if the following statements will work for your business.  As a landlord, you should consider making your business a family affair and employ your children/grandchildren to benefit from the many different tax breaks available to you.

Landlording Jobs Children Can Do

First, lets talk about what kind of tasks your children can do to assist in your landlording business.   This depends on their age.  Younger kids (under age 14) can do such tasks as sweeping walkways, clearing snow, watering plants, raking leaves, filing papers in the office, etc.  Older children (ages 14-18) can do such tasks as washing windows, painting during a vacancy, cleaning a unit, power wash the exterior of the property, cleaning the leaves from the gutters, gardening and mowing lawns, and even handle some light office work like sorting papers for bookkeeping.  If your older aged children are proficient on the computer, they can create forms for the business.   Consider personalizing forms like Move IN/OUT Itemized Statements or Maintenance and Repair Logs to keep in your files when work has been completed on a unit.

It may be a stretch, but I believe your child or grandchild can be paid for modeling in your marketing as well.  Marketing is not only for when you have a vacancy, you can pay modeling fees for websites and flyers as well.

Tax Benefits of Employing Your Children

Tax benefits of employing your child come about in a couple different ways.  By paying your child, you reduce your self-employment taxable income when it comes time to file your income taxes.  Along those same lines, you are exempt from paying payroll taxes (Social Security, FICA, & FUTA) for your child, just so long as that child is under the age of 18.

If you are a sole proprietor or a husband-and-wife LLC, you are not required to pay payroll taxes or withholdings for your child if they are under the age of 18.   If your child is 18-20 years old, you will have to remit Social Security and Medicare, but the FUTA is exempt until age 21.  After age 21, all withholding, and taxes apply.

There are tax benefits for your child as well.  As of 2020, earnings up to $12,400 per individual are tax free.   If your child works year-round on weekends and over holiday breaks and earn more than that, then the next $9,875 is only taxed at a 10% tax rate.  If you are concerned about them paying taxes, consider opening a traditional IRA where they can contribute up to $6,000 per year tax free.  This way they would only be paying taxes on the remaining $3875, or $387 for earned income of $22,275.

Of course, given the child’s age and the minimal amount of taxes they would have to pay, it might be a better option to invest a portion of their earnings into a Roth IRA.  With this option, they can withdraw their contributions at any time as ordinary income.  If they touch the earnings on a Roth IRA, then they would incur a 10% penalty.

Other Financial Benefits to Consider

Ok, so now you can see how employing your children or grandchildren can benefit the bottom line of your business.  Let’s talk about how making it a family affair and employing your children will benefit you as a landlord and as parent, not only with tax breaks.

You can also consider the fact that the monies earned by that child (it is their money) for them to use as spending money would likely be funds that you would be providing for them anyway.  You know, like money you hand out for the movies or heading to the mall.  So, you pay them for doing work around your properties which helps your To-Do list AND they will not be standing there with their hand our every time they head out the door to meet their friends.

Being this is money that you, as a parent, would more than likely be doling out to them anyway, consider using these funds as a teachable moment for managing finances.  For instance, they can keep a certain percentage for their own personal use and the rest must go into savings.   Encourage them to open a savings or investment account to save for a car, college, or even their first rental property!  Maybe open a Roth IRA and begin savings for their retirement.  You and I both know we would like to see our kids retire much younger than the norm, why not encourage them to start putting aside for this as soon as possible?

Additional Items to Note

If you have other employees, it is imperative that you treat your children the same as you would any other employee.  Your children need to show up on time, work the scheduled hours, and take the work seriously.  You also should be mindful of the hourly wage you pay your child or grandchild.  A discrimination suit is the last thing you need.  Additionally, it is important to manage their payroll and responsibilities as well.  Their work must be legitimate and salary reasonable. Keep time cards, job descriptions, and issue W-2’s just as you would for any other employee.  Lastly, check with state laws to verify the requirement to hold workers comp or disability insurance for children/grandchildren.

It is not recommended to employ your child as an independent contractor.  There are no tax breaks for you or for them with this classification.

If you own an S-Corp or a C-Corp, you do have to pay all withholding and taxes just as with any other employee.

The Bottom Line

Whether you are a hands-on landlord or pay for services like painting and landscaping upkeep, hiring your children or grandchildren to make your business a family affair to help reduce the general maintenance tasks is a no brainer.  How you, as a landlord, can employ your children for tax breaks not only saves you money, but it also allows you more time to spend with your family.  Consider this even if this time together is spent flipping a unit over a weekend.

You will teach your children the value of earning the money to purchase the things they want while showing them how you run your business.  If your children are tweens, they likely will not truly grasp this concept.  As adults, they may be thankful your entrusted them to contribute to the family business.  The lessons learned (responsibility, trust, financial, and basic homeowning skills) will be appreciated once they are out of the house and on their own.

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Here are some other articles we have written for landlords that you may find helpful as well:

The Who, What, When, and Why of Residential Vacancy Insurance

Cash Reserves For Rental Properties, How Much Is Enough?

Tips For Taking Great Rental Property Photos

Security Deposits: Top 5 Tips Landlords Should Know 

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References:

The Next Insurance Co

Henssler Financial