Hire Your Kids: A Smart Tax Strategy for Business Owners

One of the most underused tax strategies available to small business owners is also one of the most straightforward: hiring your own children to work in your business.

Done correctly, this strategy is completely legal, IRS-approved, and can save your family thousands of dollars in taxes every year. Here is exactly what the IRS says about it and how to do it right.

The IRS Allows It — With Clear Rules

The IRS explicitly permits business owners to employ their children and deduct the wages paid as a business expense. According to IRS Publication 15 (Employer's Tax Guide) and IRS Publication 929 (Tax Rules for Children and Dependents), wages paid to a child for legitimate work performed in a parent's business are deductible under IRC Section 162 as ordinary and necessary business expenses.

The key requirements are straightforward:

1. The work must be real and legitimate — tasks the business actually needs done
2. The wages must be reasonable — comparable to what you would pay a non-family employee for the same work
3. The child must actually perform the work
4. You must follow standard employment procedures — timesheets, paychecks, W-2s

If these conditions are met, the IRS treats the arrangement the same as any other employment relationship.

The Income-Shifting Benefit

When you pay your child wages, that income is taxed at your child's tax rate, not yours. For most business owners, this creates a significant tax savings.

For 2024, the standard deduction for a single filer is $14,600 (IRS Rev. Proc. 2023-34). A child who earns up to this amount in wages from your business pays zero federal income tax on those earnings.

Income above the standard deduction is taxed at the child's marginal rate — typically 10% or 12% for a young person with no other income. Compare that to a business owner in the 32%, 35%, or 37% bracket, and the tax savings on shifted income are substantial.

Important: The IRS's "kiddie tax" rules under IRC Section 1(g) apply to unearned income (dividends, interest, capital gains) — not to wages. Wages your child earns from working in your business are taxed at the child's own rate regardless of age, as long as the work is genuine.

The FICA Exemption for Sole Proprietors and Partnerships

This is where the strategy becomes especially powerful for certain business structures.

According to IRS Publication 15, Section 3, wages paid to a child under age 18 who works for a parent's business are exempt from Social Security and Medicare taxes (FICA) if the business is:

• A sole proprietorship owned by one or both parents, or
• A partnership in which each partner is a parent of the child

The combined FICA rate is 15.3% (7.65% employer + 7.65% employee). On $15,000 in wages, that is $2,295 in FICA savings on top of the income tax savings.

Additionally, wages paid to a child under age 21 who works for a parent's sole proprietorship or partnership are exempt from Federal Unemployment Tax (FUTA) under IRC Section 3306(c)(5).

Critical note from the IRS: These exemptions do not apply to S Corporations or C Corporations. If your business is incorporated, your child's wages are subject to normal FICA and FUTA taxes. The income-shifting benefit still applies, but the payroll tax exemption does not.

What Kind of Work Qualifies

The IRS requires that the work be legitimate and age-appropriate. The work must be something the business genuinely needs, and the wage must reflect what you would pay an unrelated employee for the same tasks.

Examples of legitimate work by age group:

Younger children (7–12):

• Cleaning and organizing the office or workspace
• Shredding documents
• Stuffing envelopes or preparing mailings
• Helping at business events

Teenagers (13–17):

• Social media content creation and management
• Photography for the business website or marketing materials
• Data entry and filing
• Customer service support
• Bookkeeping assistance (with supervision)
• Inventory management

Older teens (16–18):

• Administrative support
• Website updates and maintenance
• Research and reporting
• Graphic design (if skilled)

The IRS will scrutinize arrangements where children are paid for work they did not actually perform, or where wages are grossly disproportionate to the tasks. Document everything carefully.

Required Documentation — What the IRS Expects

The IRS expects you to treat your child like any other employee. That means maintaining the same records you would keep for any worker on your payroll.

What you must have:

• Timesheets — record the hours worked and tasks performed for each pay period
• Paychecks or direct deposit records — pay by check or bank transfer, not cash; this creates a paper trail
• W-2 at year-end — issue a W-2 to your child just like any other employee, even if they owe no taxes
• Payroll tax filings — file Form 941 (quarterly) and Form 940 (annual FUTA) as required; note the applicable exemptions
• A bank account in the child's name — have your child deposit wages into their own account to demonstrate the money is genuinely theirs

Failure to maintain these records is the most common reason the IRS disallows family employment deductions on audit.

The Roth IRA Opportunity

Once your child has earned income, the IRS allows them to contribute to a Roth IRA — up to the lesser of their earned income or the annual contribution limit. For 2024, the Roth IRA contribution limit is $7,000 (IRS Publication 590-A).

Wages from your business count as earned income for this purpose. You can contribute to the Roth IRA on your child's behalf, as long as the contribution does not exceed their earned income for the year.

A Roth IRA funded in your child's teenage years grows tax-free for decades. The combination of a business deduction for the wages paid and tax-free compounding in the Roth IRA makes this one of the most efficient wealth-building strategies available to family business owners.

A Practical Example

You own a sole proprietorship and are in the 32% federal tax bracket. You hire your 15-year-old to manage your business social media accounts and assist with office tasks — 10 hours per week at $15 per hour.

Over the year, that is approximately $7,800 in wages.

• Your business deducts $7,800, saving you $2,496 in federal income tax (32% bracket)
• Your child pays zero federal income tax (below the $14,600 standard deduction)
• No FICA taxes apply (sole proprietorship, child under 18 per IRS Publication 15)
• No FUTA applies (child under 21 per IRC Section 3306(c)(5))
• You contribute the $7,800 to a Roth IRA in your child's name
• Total immediate tax savings: $2,496, plus decades of tax-free Roth growth

That is a significant return for a straightforward, fully compliant arrangement.

Common Mistakes That Trigger IRS Scrutiny

Paying for household chores. The IRS distinguishes between work performed for the business and normal household responsibilities. Mowing the family lawn, doing dishes, or cleaning their bedroom are not deductible business expenses.

Inflated wages. Paying a 10-year-old $50,000 a year will not survive scrutiny. Wages must be reasonable for the work performed and comparable to market rates.

No documentation. If you cannot produce timesheets, paychecks, and a W-2, the IRS can disallow the deduction entirely.

Paying in cash. Cash payments with no paper trail are a red flag. Always pay by check or direct deposit.

Assuming the FICA exemption applies to corporations. It does not. If your business is an S Corp, budget for payroll taxes on your child's wages.

When to Set This Up

The best time to implement this strategy is at the beginning of a tax year so you have a full year of wages to deduct. But starting mid-year is still worthwhile — partial-year savings are better than none.

If you have children between the ages of 7 and 18 and you own a business, this strategy deserves a serious look. The documentation requirements are manageable, the tax savings are real, and the side benefit of teaching your children about work and money is invaluable.

At OnPoint Business Tax & Accounting, we help business owners in New York and New Jersey implement family employment strategies the right way — with proper payroll setup, correct documentation, and maximum tax savings. Book a free consultation to find out how much your family could save.

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Sources: IRS Publication 15 (Employer's Tax Guide); IRS Publication 929 (Tax Rules for Children and Dependents); IRS Publication 590-A (Contributions to Individual Retirement Arrangements); IRC Section 162; IRC Section 1(g); IRC Section 3111(a); IRC Section 3306(c)(5); IRS Rev. Proc. 2023-34. For the most current guidance, visit IRS.gov.