Should You Pay Your Kids to Work on the Family Farm or Ranch?

Growing up on a farm in Nebraska, I learned some of the greatest lessons of my life: hard work, grit, always doing your best, never underestimating a mean cow, and always making sure to turn off the water. My parents, grandparents, aunts, and uncles instilled in me a work ethic and passion that is truly unique to agricultural communities.

Farming and ranching are often family businesses, and there's an old adage that farmers have lots of kids for free labor. But the real question is, should you pay your kids to work on the family farm or ranch?

In this blog, we'll explore the pros and cons of compensating children for their work, the tax benefits, and how it can foster financial independence in your children.

Pros of Paying Your Kids

Pro #1: Skill Development

Having your children work on the farm teaches them responsibility, hard work, and important agricultural skills. These skills are not only valuable on the farm but also beneficial if they pursue jobs off the farm. Being paid for their work can enhance their technical school or college applications and serve as a great resume booster. The skills they learn are lifelong. If they choose to return to the farm someday, they will have already started building the necessary skills. For example, where else will my skill of castrating and vaccinating a baby pig in 21 seconds come in handy?

Pro #2: Financial Education

Paying your children for their work, even if it's not minimum wage, helps them understand the value of money and how the real world operates. This early financial education can teach farm kids the basics of saving, spending, and budgeting, putting them ahead of peers who don’t have these experiences. It’s one thing to hear about money management in school; it’s another to experience it firsthand by earning and managing their own income.

Pro #3: Motivation & Productivity

Money can be a great motivator. Paying your kids can encourage them to take ownership of their work and reap the rewards of their hard labor. Offering incentives for better performance and increased productivity can further motivate them. When children see a direct correlation between their efforts and financial rewards, it can instill a strong work ethic and drive that will benefit them throughout their lives.

Pro #4: Tax Benefits

Paying your children can offer tax benefits for the farm or ranch, as it counts as additional labor expenses. We recommend consulting with your accountant to get the best tax breaks for these payments. This not only helps in reducing the overall tax burden but also provides a structured way to manage family finances.

Cons of Paying Your Kids

Con #1: Potential for Overwork or Burnout

Whether you pay your children or not, there is a risk of overwork. Ensure your children want to work on the farm and can balance their education and extracurricular activities. If you're not careful, paying them might lead to burnout faster. It’s crucial to monitor their workload and ensure they have time to enjoy their childhood and focus on their studies.

Con #2: Tax Complications

While there are tax benefits, paying your children can also introduce complex tax laws and regulations. It's crucial to discuss this with your trusted accountant or tax preparer to avoid mistakes or errors, especially if you’ve never had employees before. Missteps in this area can lead to penalties and additional stress for the family business.

Con #3: Family Dynamics

Paying children based on age, productivity, or skill levels can lead to tensions among siblings regarding pay distribution. This can strain family relationships, even into adulthood. Consider how you will ensure fairness and how pay and hours worked will affect the estate and succession planning. Open communication and setting clear expectations can help mitigate these issues.

Con #4: Financial Pressure

Teaching children about finances early can be beneficial, but it's important to balance this with allowing them to have a real childhood. Discuss with your partner and family to ensure that financial lessons don’t overshadow their childhood experiences. Too much emphasis on money can create undue stress and rob them of carefree moments.

Maximizing Tax Returns by Paying Children

Understanding IRS Regulations

Familiarize yourself with IRS rules regarding child wages in family businesses, including age restrictions and types of work allowed. This knowledge is essential to avoid legal pitfalls and ensure compliance.

Wage Limits and Tax Brackets

Set appropriate wages to stay within beneficial tax brackets. Utilize the standard deduction for dependents to maximize tax efficiency. Proper planning can lead to significant savings.

Payroll Management

Maintain proper documentation and payroll practices. Keep accurate records to support tax filings. This discipline not only helps with compliance but also teaches children the importance of meticulous record-keeping. FarmRaise Payroll can help you track this, helping you to save time and money! 

Tax-Saving Strategies

Employ children under 18 to benefit from self-employment tax exemptions. Use tax-advantaged accounts like Roth IRAs for children to enhance their financial future. These strategies can provide substantial long-term benefits for both the family business and the children.

Fostering Financial Independence in Farm and Ranch Children

Early Financial Literacy

Teach children about earning, saving, and investing. Involve them in financial decision-making. These early lessons can have a profound impact on their future financial behavior.

Savings and Investment Opportunities

Open savings accounts and custodial accounts for them. Encourage long-term investments and savings habits. For example, I was able to pay for part of my college tuition through money made from the sales of my cattle and pig. This not only instills a sense of accomplishment but also prepares them for financial responsibilities in adulthood.

Entrepreneurial Mindset

Inspire children to think like entrepreneurs. Encourage them to start small ventures, such as funding their 4-H or FFA projects through their farm work. This entrepreneurial spirit can lead to innovative ideas and potential business ventures in the future. There is also opportunities through the USDA Farm Service Agency for Youth Loans to fund these projects. 

Responsibility and Independence

Build their confidence and self-reliance. Prepare them for future financial independence. These traits are invaluable as they transition into adulthood and navigate their own careers and finances.

Paying your children for their work on the family farm or ranch has many benefits, such as skill development, financial education, motivation, productivity, and tax advantages. However, it also comes with potential downsides, like the risk of overwork, tax complications, family dynamics, and financial pressure.

I wouldn't trade growing up on a farm for anything, as it has shaped my future career and my potential to take over our family business with my sister. However, it's essential to discuss paying your children with all those involved in the business, your financial advisors, and your accountants. Consider the outcomes you want from paying your children: is it just for the tax benefit, or is it also to give them a head start in the future?

Call to Action

We invite you to share your experiences and thoughts on paying children for farm and ranch work. How has it impacted your family and your business? Let’s start a conversation!

Ready to get started with FarmRaise Tracks to get your finances on track? Use code IT3H12B for 20% off, or click here to get started.
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More Resources on Paying Children in Family Businesses:

How to Keep Your Children Safe on the Farm: https://nasdonline.org/1278/d001082/farm-safety-for-young-children.html

IRS Family Help: https://www.irs.gov/businesses/small-businesses-self-employed/family-help

9 Tips for Teaching Kids about Money: https://www.schwab.com/learn/story/9-tips-teaching-kids-about-money