Living the American Dream has long been thought to mean owning your own home. I understand that sentiment as well as anyone, having been a homeowner for five decades. For many people, the American Dream doesn’t stop there. Those working for themselves often desire a level of independence and control not found in large organizations. Concurrently, most parents desire to have their children live even better than they themselves do.

While not for everybody, self-employment, in one form or another, constitutes nearly one quarter of the workplace. Having devoted my adult lifetime to avoiding having a non-family boss, I understand most of the pros and cons of self-employment. Family relationships, income taxes, flexibility, responsibility, and a host of other factors are affected by employment status. How a self-employed individual and his or her family deal with each determines the financial and emotional outcome of a lifetime’s endeavors.

Successful self-employed people have the opportunity to jump-start their children’s retirement savings before those offspring even reach age 18. Understanding both the opportunities and pitfalls of employing one’s children is crucial to success. Errors can be costly to all involved.

With summer upon us and school out of session, many people are presented with an opportunity to help their kids. Employing children in a family business also offers financial benefits to everyone involved. The kids get their first exposure to both the demands and rewards of having a job, while parents are able to reduce their own taxable income, rather than simply gifting money to those kids.

Paying post-high-school educational expenses (outside student loans) for children generally requires after-tax dollars. Parents’ tax rates are generally much higher than the rates their children pay, which can often be held at zero with careful income planning. Paying wages to the children and having them help to fund their own higher education (using their own tax rate) generates more post-tax dollars.

Individual Retirement Accounts (IRAs) require that contributions not exceed earned income. Many children do not have jobs in their high school years, and cannot contribute to IRAs. Employing children affords them the opportunity to contribute to their own IRA. Importantly, parents may gift them the money for their contributions, but so long as their kids receive a W-2 for income verification, no one cares where the deposited funds originate.

Taking advantage of opportunities presented with self-employment by hiring your own children is not without strict and numerous rules. In coming Blogs, we will discuss more opportunities and many potential pitfalls associated with hiring and paying young family employees.