However, the key word is legitimately. The IRS allows this strategy, but only if the child actually performs real work and is paid a reasonable wage.
Let's walk through how it works.
Why Hiring Your Kids Can Save Taxes
When you pay wages to your child from your business, several things happen at once:
- The wages become a tax-deductible business expense.
- The income shifts from your high tax bracket to your child's very low tax bracket.
- In many cases, the income may be completely tax-free.
For high-income entrepreneurs, this can create significant family tax savings.
Example
Suppose a solo entrepreneur pays their child $15,700 per year for legitimate work in the business. That amount equals the standard deduction for single taxpayers (2025).
- The business deducts $15,700
- The child owes $0 federal income tax
- The family shifts income from a 37% bracket to 0%
Potential tax savings: $5,000+ per year per child
No Payroll Taxes if the Child is Under 18
A major benefit applies if the business is structured as a sole proprietorship or a single-member LLC taxed as a sole proprietorship. If the child is under age 18, wages paid to them are not subject to Social Security or Medicare taxes (FICA).
This means:
- No employer payroll taxes
- No employee payroll taxes
Additionally, if the child is under 18, their wages are also exempt from FUTA (federal unemployment tax). This makes hiring your children far more tax-efficient than hiring unrelated employees.
Important Business Structure Rule
This benefit applies only when the business is:
- Sole proprietorship
- Single-member LLC taxed as sole proprietor
- Partnership where both partners are parents
It does not apply if the business is an S-corporation or C-corporation. In those structures, payroll taxes do apply to wages paid to children.
What Work Can Your Kids Do?
Your child must perform real, legitimate work for the business. Common examples include:
- Social media management
- Office organization
- Data entry
- Cleaning the office
- Filing paperwork
- Packaging products
- Photography or marketing content
- Website testing
Even younger children can participate in age-appropriate tasks such as organizing materials or helping with simple administrative work.
The Pay Must Be Reasonable
You must pay reasonable wages for the work performed. For example:
- Paying a 10-year-old $200/hour would raise IRS concerns
- Paying $15–$20/hour for administrative help is generally reasonable
Document the hours worked and tasks completed.
Documentation is Critical
To make the strategy IRS-proof, treat your child like a real employee. Best practices include:
- Written job description
- Time tracking or timesheets
- Paying wages through payroll
- Issuing a W-2 at year-end
- Paying wages through bank transfer or check (not cash)
You should also maintain records showing the work performed.
Consider Investing the Earnings
One of the most powerful aspects of this strategy is what you can do with the income afterward. Instead of spending the money, the child can contribute to a Roth IRA.
Example: If a child earns $7,000 and contributes it to a Roth IRA at age 14, it could grow for 50+ years completely tax-free. That single contribution could potentially grow to hundreds of thousands of dollars.
A Simple Strategy With Huge Benefits
Hiring your children can create multiple benefits:
- Lower family taxes
- Tax-deductible wages for the business
- Tax-free income for the child
- Early retirement savings
- Real-world work experience
When structured correctly, this is one of the cleanest and most IRS-approved income-shifting strategies available to entrepreneurs.
Final Thought
The key rule is simple: Your child must actually do the work, and the pay must be reasonable.
When done properly, hiring your kids is not just a tax strategy, it's a way to involve your family in your business while building financial education early.