Running a family business isn’t just about keeping things running smoothly—it’s about building something meaningful together. When you hire your children to work in your business, you’re not only teaching them invaluable life lessons about responsibility and hard work, but you’re also setting up your family for financial success.
The best part? This can all come with significant tax benefits if approached correctly. Think of this as a way to reinforce strong values while ensuring you make the most of available tax-saving strategies. In this guide, we’ll walk you through the key advantages of this approach and show you how to get the most out of it.
1. Deduct Their Wages as a Business Expense
One of the most straightforward benefits of hiring your children is the ability to deduct their wages as a business expense. This deduction directly reduces your taxable income, which can lead to substantial savings. However, for this strategy to work, the compensation must align with the value of the work performed—just as you would pay any unrelated employee for the same tasks.
For instance, if your teenager assists with inventory management, handles administrative tasks, or supports customer outreach, their compensation should reflect current local wage standards. By aligning wages with standard rates, you adhere to tax regulations and teach your child about the professional value of their time and effort.
Beyond compliance, consider revisiting and adjusting their pay periodically. Tax regulations and wage standards evolve due to inflation and market trends, making it essential to stay updated. This ensures your deduction remains reasonable and compliant while optimizing your tax benefits.
Tip: Consistent documentation of tasks, hours, and pay rates not only keeps your records organized but also serves as a protective measure during tax reviews.
2. Avoid Payroll Taxes (If Certain Conditions Are Met)
Did you know that you can potentially avoid payroll taxes for your children under specific circumstances? If your business operates as a sole proprietorship or a partnership between spouses, you’re exempt from withholding Social Security and Medicare (FICA) taxes for children under 18. Additionally, federal unemployment (FUTA) taxes do not apply until they turn 21.
This exemption can lead to significant savings over time. For example, let’s say your child earns $12,000 a year working for your business. By avoiding FICA taxes, you could save approximately $918 annually—a notable reduction in payroll expenses.
However, if your business is structured as a corporation, LLC, or partnership involving non-parent partners, this exemption does not apply. Therefore, carefully evaluating your business structure is key to unlocking this benefit. Consulting with a tax professional can help you understand whether restructuring your business could provide long-term financial advantages.
Note: Ensure that the work performed by your child is age-appropriate and necessary for your business. This strengthens your case should your records ever be audited.
3. Lower Their Taxable Income
Another key advantage of hiring your children is the ability to lower their taxable income using the standard deduction. In 2023, the standard deduction for single filers was $13,850. This means your child can earn up to this amount without incurring federal income taxes, provided they have no other significant sources of income.
To illustrate, if your child earns $10,000 annually through your business, their entire income may be shielded from federal taxes. This not only helps them save more of their earnings but also demonstrates the value of strategic financial planning.
However, be mindful of your state’s tax rules. Each state has different income thresholds and deduction amounts, so understanding these differences early can prevent unexpected tax liabilities. This strategic awareness allows you to maximize both federal and state-level benefits for your family.
Pro Tip: Help your child track their earnings and savings using financial apps or spreadsheets. This makes financial planning more interactive and builds habits that will benefit them in adulthood.
4. Fund a Roth IRA for Future Financial Security
Encouraging your child to contribute their earnings to a Roth IRA can set them up for long-term financial success. In 2023, the annual Roth IRA contribution limit was $6,500 or the child’s earned income, whichever was lower. Because contributions are made with post-tax dollars, the funds grow tax-free and can be withdrawn without penalties in certain circumstances.
Encouraging your child to contribute their earnings to a Roth IRA can set them up for long-term financial success. In 2024 and 2025, the annual Roth IRA contribution limit is 7000 or the child’s earned income, whichever was lower. Because contributions are made with post-tax dollars, the funds grow tax-free and can be withdrawn without penalties. There are no limits here.
Imagine your 16-year-old contributing $3,000 annually from their earnings. By the time they reach 30, that account could grow substantially due to compound interest. A Roth IRA offers flexibility, too—funds can be used for significant life expenses such as education, purchasing a first home, or emergencies.
Starting this financial habit early teaches the importance of saving and the power of long-term investing. Your children will learn that a small sacrifice today can lead to substantial rewards tomorrow.
Bonus Tip: Consider matching a percentage of their contributions as a family incentive. This reinforces positive financial behaviors and strengthens their commitment to saving.
5. Shift Income to Reduce Your Family’s Tax Burden
One of the most impactful aspects of paying your children is the ability to shift income from your higher tax bracket to their lower (or even zero) tax bracket. By doing so, you effectively lower your family’s overall tax burden and keep more money within your household.
For example, let’s say you’re in a 35% tax bracket, and your child’s income qualifies for zero tax. Instead of paying an unrelated employee, hiring your child means the wages are taxed at their lower rate (or not taxed at all), potentially saving your family thousands of dollars annually.
Beyond the financial benefits, this strategy encourages valuable conversations about money management. When your children understand how income, taxes, and deductions work, they’re more likely to make informed financial decisions later in life.
Pro Tip: Use family finance meetings to discuss these strategies openly. This not only builds financial literacy but also strengthens transparency and trust within your family.
6. Plan for Educational and Other Savings Goals
Your child’s earnings can also be used to fund educational expenses or a 529 plan without triggering gift tax implications. A 529 plan offers tax-free growth when used for qualifying education expenses, making it an excellent way to support future academic goals.
By encouraging your children to contribute to their educational savings, you’re reinforcing the importance of planning ahead. This strategy can also reduce their need for student loans and related financial stress.
Additionally, involve your children in decisions about how their earnings are allocated. By participating in these discussions, they learn the value of prioritizing their goals and balancing short-term desires with long-term needs.
Action Step: Consider matching their 529 contributions to show how savings can grow faster when contributions are consistent.
Key Compliance Guidelines
To keep your strategy compliant and avoid issues with the IRS, follow these key guidelines:
- Ensure the work performed by your child is real, necessary, and age-appropriate.
- Pay wages that align with what you’d pay an unrelated employee.
- Maintain detailed records, including hours worked, tasks completed, and payment dates.
Issuing a W-2 at the end of the year helps formalize their employment status. Additionally, staying updated on your state’s labor laws ensures that your approach remains compliant. The W-2 is what makes it FICA tax-free when you employ them as a sole proprietorship (owned by a parent) or a partnership between spouses (parents).
By taking these steps, you create a seamless process that strengthens your business while fostering a responsible and productive mindset in your children.
Final Thoughts
Paying your children for their contributions is more than a tax-saving strategy—it’s an investment in their future. With careful planning and professional guidance, you can reduce your family’s tax burden, teach financial responsibility, and strengthen family bonds. The rewards extend far beyond the numbers, helping your children develop skills and habits that will serve them for a lifetime.
Emily Sprinkle, also known as Emma Loggins, is a designer, marketer, blogger, and speaker. She is the Editor-In-Chief for Women's Business Daily where she pulls from her experience as the CEO and Director of Strategy for Excite Creative Studios, where she specializes in web development, UI/UX design, social media marketing, and overall strategy for her clients.
Emily has also written for CNN, Autotrader, The Guardian, and is also the Editor-In-Chief for the geek lifestyle site FanBolt.com
- Emma Loggins Sprinklehttps://www.womensbusinessdaily.com/author/emma-loggins/
- Emma Loggins Sprinklehttps://www.womensbusinessdaily.com/author/emma-loggins/
- Emma Loggins Sprinklehttps://www.womensbusinessdaily.com/author/emma-loggins/
- Emma Loggins Sprinklehttps://www.womensbusinessdaily.com/author/emma-loggins/