At what age can I hire my children?

This answer was provided by Mark Misselbeck, CPA, from Levine, Katz, Nannis & Solomon PC in Needham.

Q: What is the youngest age you can hire your own children to work in your family business, and what is the maximum you can pay them to gain maximum tax savings? If you paid them say, $5000, and they turn around and put that into a 529 plan that you set up on their behalf, is that OK? Can you take the deduction into the 529 plan? -- Sam, Bedford

A: There is no lower limit to the age at which a child may be employed under the tax law, however, you should check with the state labor department about child labor law limits. Realistically, you need to be able to either prove by documentation or convince through argument and demonstration to the satisfaction of an IRS examining agent that your children actually provided services to your business for which you paid them what you would have paid an unrelated party. Provided you can get over that hurdle, the pay is deductible by your business and taxable to your child.

There is no deduction for any funding of a Section 529 - the only tax benefit is that the funds grow tax-deferred and may be used for higher education.

You should consider funding either a deductible IRA account (called a Traditional IRA by the custodial companies) or a ROTH IRA (a seemingly better choice at the low tax bracket that the child would enjoy, since the distributions from a Traditional IRA account would be fully taxable at the tax rates in effect at your child's retirement versus NO tax on the ROTH distributions, provided they are taken AFTER age 59 & 1/2.

Related article by the Mass. Society of CPAs