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If you’re a business owner, hiring your children can be a great tax-saving strategy. Hiring your children to work in your business can be a game-changer, offering significant tax benefits when done correctly. It's a chance to bond as a family, teach them life skills, and secure their financial future. However, the IRS has specific rules you need to follow to ensure compliance.
Yes! The IRS permits business owners to hire their children as long as they perform legitimate work for the company.
Tax Deductions
You can deduct your child's wages as a business expense, lowering your business's taxable income.
Income Shifting
Shift income from your higher tax bracket to your child's, who likely falls into a lower bracket.
Tax-Free Income for Your Child
Your child can earn up to the standard deduction amount each year without paying federal income tax. The standard deduction for single filers in 2025 is $15,000.
Payroll Tax Savings
If your business is a sole proprietorship or a partnership where both parents are the only partners, wages paid to children under 18 are exempt from payroll taxes like Social Security and Medicare.
Roth IRA Contributions
Give your child a financial head start with a Roth IRA! Your child can contribute up to $7,000 in 2025, allowing for tax-free growth and withdrawals in the future.
Source: www.beyond-wealth.com
Flexible Withdrawals
Contributions can be withdrawn to pay for college, a first home, or emergencies.
Smart Wealth Building
Start early and maximize long-term savings.
To make the most of this tax strategy, it's essential to follow these IRS guidelines:
Legitimate Work
Your child must perform necessary for your business. Personal tasks don't count.
Age-Appropriate Tasks
Ensure the work is suitable for the child's age and abilities.
Examples:
Ages 7-10: Modeling for marketing materials, filing, organizing supplies, or cleaning the office.
Ages 12-15: Helping with customer service or managing social media.
Ages 16+: Bookkeeping, marketing, or running errands.
Pay a Market Rate
Compensate your child a fair wage, similar to what you'd pay a non-relative employee for the same work. A great resource is Salary.com
Follow Employment Laws
Treat your child like any other employee regarding tax withholding, forms, and documentation.
Maintain Detailed Records
Keep accurate records including job descriptions and timesheets, checks issued, and taxes paid. Paying them via your payroll company is strongly recommend!
The tax treatment of your child's wages can vary depending on your business structure and their age. Here's a breakdown:
A small social media consulting business (Sole Proprietorship) hire their 16-year-old daughter to manage the company Instagram account for $20 per hour. She works 10 hours per week for 12 weeks during the summer, earning $2,400 total. The business can deduct the $2,400 on their business tax return. The pay is not subject to Social Security or Medicare taxes since she’s under 18.
If your company is already setup as an S-corp or C-corp and you are looking for a way to completely avoid FICA taxes when hiring your children (under 18 years old), there’s an advanced strategy that involves setting up a management company, follow these steps:
1. Establish a management company. This company, structured as an LLC or sole proprietorship, will manage your corporation.
2. Your main operational company (S-corp or C-corp) pays a management fee to the management company (LLC or sole proprietorship) and records it as a tax deduction.
3. The management company (LLC or sole proprietorship) then pays your children. Since the children are paid through an LLC or sole proprietorship, they do not need to pay payroll taxes.
✔ Document Their Work (photos, time logs, sample work)
✔ Pay a Reasonable Wage (comparable to industry rates)
✔ Issue Payments via Payroll (direct deposit or check)
✔ Avoid Overpaying (excessive wages may trigger IRS audits)
✔ File a W-2 If Required (if FICA applies)
Hiring your children can provide real-world experience for them while also creating tax benefits for your business. The child's wages can be deducted as a business expense, reducing the business’ taxable income. The child can also earn up to a certain amount without paying federal income tax. However, there are rules that need to be followed, including giving them an actual job, making sure the work is age-appropriate, paying wages, following employment laws, and keeping good records.
Getting started with hiring your children for tax benefits can feel overwhelming, but we're here to help!
Schedule a consultation today to see if this strategy works for your business.
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