Hiring your kids in your business can be a good strategy, but many people don’t know exactly how it works.
First, why would you hire your child in your business?
There are three main benefits:
- You can deduct their salary as a business expense.
- Depending on the amount, your child could pay zero federal income tax. State taxes may apply.
- They become eligible to contribute to a Roth IRA, which is arguably one of the most important perks. Imagine having ~50 years of tax free growth.
Now, the type of business entity you have really matters for this strategy.
If you’re a sole proprietorship or a parent-only partnership, you don’t pay payroll taxes, but you may need to withhold income taxes.
If you’re a corporation (including S corporation), payroll taxes, income tax withholding, and FUTA apply.
So, as you can imagine, the net tax savings would depend on whether or not you have to pay payroll taxes (Social Security of 6.2% and Medicare of 1.45%).
Before we dive into the main components of employing your child, you need to have a business where your child could perform reasonable tasks. For example, for a CPA firm, it could include some basic data entry, migration, or faxing/mailing documents. But if you have an engineering business, it could be difficult to do this strategy.
Now, let’s discuss some practical components:
1. Pay reasonable wages
Ask yourself: “What would I pay someone else for this work?”
If your child is stacking pages, organizing, printing, or faxing documents for your business, that’s probably a minimum wage type job. You cannot pay $100 an hour for that.
If your business is in the media space or ecommerce, check what reasonable wages are for modeling.
You have to document how you came up with the hourly rate you paid in case of an audit. Take screenshots and documents
2. Track everything
You need to track:
- Daily hours worked
- Description of duties (be as specific as you can)
- Proof of work done (if possible, evidence like photos, screenshots, or final documents)
You should ask your child to fill this out and sign off on it.
Examples: “Organized expense receipts for October,” “Created Canva designs for social media post,” “Labeled and packed customer orders”
3. Do payroll and file reports
You must:
- Run payroll for your child
- Issue a W-2 form
- File quarterly payroll reports (like 941s, 940s), including state return
- File a Form 1040 tax return for your child
If you already do payroll for yourself, this should be relatively straightforward. If not, you’ll need to factor in compliance costs and effort.
4. Actually pay your child
It’s not enough to just say your child is being paid. The money has to actually move into their control. That means transferring the wages to a bank account in their name, or a joint account that they can access.
Most banks allow children under 18 to have accounts if a parent or guardian is a co-owner.
5. Comply with child labor laws
It’s important to follow the rules for employing children, both for safety and to stay compliant with the law.
For example, in Illinois, children under 16 may need a work permit before they can start working. Check your local school or state labor office to see what’s required.
6. Consider state and local taxes
Your child may owe state or local income taxes depending on where you live and how much you pay them. Your federal tax savings will likely exceed any state or local taxes, but it’s worth factoring them into your final calculations.
Quick example:
Let’s assume that you are a single member LLC (disregarded entity) and want to hire your child. You paid them $5,000 in a year for all the work. If you are in a 37% marginal tax rate, that’s $1,850 of tax savings (assuming no state/local taxes), minus any additional compliance cost.
Your child will not owe federal income tax, since $5,000 is below the standard deduction ($15,750 in 2025). Your child can also put that $5,000 into a Roth IRA (note: contributions are limited to the child’s earned income or the annual IRA limit, which is $7,000 in 2025)
So, is it worth it to go through all the hassle?
It depends. It could be a great strategy if:
- You have the means to pay them
- You’re in a high tax bracket
- You have multiple kids
- You already have payroll systems in place
- You have a legitimate work they can do that’s trackable
- You want to build wealth for them by using Roth IRAs
For most people, the juice isn’t worth the squeeze. But in some situations, it could potentially be helpful.
I hope you learned something new.
Chat next Saturday.