Hiring your kids in your business is a great way to teach them about entrepreneurship while creating opportunities for tax savings and financial growth. In this article, we’ll explore the tax benefits of employing your children, the rules to follow to stay compliant, and why putting their earnings into a Roth IRA is a smart long-term investment and can set them up for retirement before they even go to college.
Tax Benefits of Hiring Your Children
Hiring your kid to work in your business is a smart tax-saving strategy that also keeps income within your household. The IRS allows business owners to pay their children for legitimate work, and these wages can help reduce your taxable income and payroll taxes. Here’s how the tax benefits break down:
1. Deduct Wages as a Business Expense
When you pay your child for legitimate work, their wages are treated like any other business expense. This means the amount you pay them reduces your business’s taxable income. It’s a legal way to shift income to a lower tax bracket while teaching your child valuable work skills.
Example: If your business earns $100,000 net income in a year and you pay your child $10,000 for their work, your taxable income decreases to $90,000. You save taxes on the $10,000, which stays in the family (even though you do need to pay your kids their wages).
2. Exemption from Payroll Taxes
For sole proprietorships and certain partnerships (where both partners are the child’s parents), wages paid to children under 18 are exempt from Social Security and Medicare taxes. This saves money for both you and your child.
Example: Normally, you’d pay 15.3% in combined payroll taxes (employer and employee shares) on wages. By hiring your child under 18, this tax doesn’t apply.
There are also ways to eliminate payroll taxes with S Corps and C Corps, but you’ll want to consult with a tax advisor.
3. Income Tax Savings for Your Child
Your child can use the standard deduction, which is $14,600 in 2024, to offset their wages. As long as their income stays under this amount, they won’t owe federal income tax – and probably won’t owe state taxes either.
Why This Matters: Your child earns tax-free income while you get the business deduction. It’s a win-win strategy that maximizes your family’s overall financial efficiency.
Even if you end up paying your kids more than the standard deduction amount, they’ll likely still be in a lower tax bracket than you are. By shifting that income to a lower tax bracket, you’ll save money overall.
Rules to Follow When Hiring Your Kids
While hiring your children comes with great tax benefits, the IRS has strict rules to ensure this arrangement isn’t abused. Following these guidelines (as well as consulting with a tax advisor before implementing any of these strategies) will keep you compliant.
1. Legitimate Work
Your child must perform real, age-appropriate tasks that genuinely contribute to your business. Examples include filing, cleaning, or even helping with social media if they have the skills. Typically, your kids will need to be at least 7-10 years old to qualify to be employees.
2. Reasonable Compensation
You must pay your child a wage that aligns with what you’d pay any other employee for the same work. Overpaying to inflate deductions could trigger IRS scrutiny. For example, If your child helps with office cleaning, you might pay them $15 per hour – the same as you’d pay a hired cleaning service.
3. Proper Documentation
Treat your child like any other employee by maintaining accurate records, including job descriptions, timecards, and paystubs. Keep documentation that the wages are for real work.
4. Tax Withholding
For children under 18, Social Security and Medicare taxes aren’t required in certain cases. However, federal income tax withholding rules still apply if they exceed the standard deduction.
Why Put Their Earnings into a Roth IRA
At Young and Co, we like to recommend that you invest your kids’ earnings into a Roth IRA on their behalf for exponential tax savings! Once your child starts earning income from a job, they qualify to contribute to a Roth IRA.
Tax-Free Growth and Flexibility
A Roth IRA allows your child’s contributions to grow tax-free over decades. They don’t get a tax deduction for contributing up front, but they won’t need it since their income is going to be zero or very low. And later on, qualified distributions are tax-free – including investment earnings! While the money can be withdrawn before retirement for certain expenses like education or a first home, leaving it untouched until retirement maximizes its potential.
Starting Early Makes a Huge Difference
Let’s look at an example to see the power of compounding:
- Suppose you pay your child $7,000 annually (the 2025 Roth IRA max) from ages 7 to 18 and invest it in a Roth IRA with an average return of 7% per year.
- By the time they turn 18, they would have $110,485 in their Roth IRA.
- If that money stays invested and continues earning a 7% return, it would grow to an incredible $2,656,695 by the time they turn 65 -even if they never contribute another dollar after age 18. All thanks to the power of compound interest and time invested!
Building Financial Discipline
Contributing to a Roth IRA also teaches your child about saving and investing, helping them develop healthy financial habits early on. It’s a gift that goes far beyond the immediate tax benefits.
Looking to Save More on Taxes as a Business Owner?
If you’re ready to uncover more tax-saving strategies, check out our free Tax Savings Menu! This guide covers over 75 potential tax deductions, credits, and strategies that could save you thousands on your tax bill.
Taking a proactive approach to your business finances can make a huge difference, and we’re here to help you navigate it all! Grab your free guide, and let’s get those savings rolling!
Young and Co empowers service-based business owners to make an impact in their world through strategic financial services. Let us be your partner in understanding how to confidently handle growth in your business. Together, we’ll build a strategic plan that sets you up for long-term financial success. Learn more about our services and how we can support you in your business endeavors by visiting our website today!
Looking for tax support for your small business? Fill out our Tax Assessment Questionnaire to learn more.
Don’t forget to follow us on LinkedIn, Instagram and Facebook.