How Much Should You Pay Your Children as Employees?
When your children are employees, understanding how much to pay them is complex. There is a need to support a standard of living for family member employees (FME) but it is not recommended to pay them more than you would a common law employee under comparable circumstances. There are no secrets within a business. Believe it or not, your employees will find out if a family member is being overpaid and resent them (and you). It will create a perception of your child having a privileged position. Needless to say, this can turn the work environment toxic.
One way to keep this from happening is to create a salary range for the positions in your organization. This gives you an opportunity to take into consideration any outside experience your children may have gained as employees of someone else’s company. If they don’t have outside experience, then you can pay them in the bottom quartile of the position’s pay range. If and when their performance merits additional pay, then – and only then – give them a raise. If they are in a sales position, use the same pay plan you use for other salespeople.
Kids in the business have formidable challenges just doing their job and earning the respect of employees. Don't magnify this challenge by setting them up for resentment. Furthermore, you are hindering the development of competent, capable, and committed successors if you pay extra for ordinary. Like all your employees, you want your children to be extraordinary and motivated to work for the pay they deserve. Therefore, pay ordinary for ordinary and make a big deal of any additional compensation merited as public recognition for the extraordinary. If they are financially unable to live the lifestyle you want for them, give them a gift but do not let them think they are entitled to extra pay simply because they are a family member.
Remember that lifestyle is a choice and there is certainly nothing wrong with letting your kids realize one of the keys to independence is financial freedom. However, if you do choose to give them a gift, know that it is a good way to supplement their earnings. The amount you gift on an annual basis may change as a result of the 2020 elections, so stay current with tax regulations to maximize the impact of your gift.
Dan Schneider is a partner/director of The Rawls Group, a business succession planning firm. For additional information, visit www.seekingsuccession.com or call 407-578-4455.
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