Build Wealth For Them. Save Taxes For You.
Stop giving your kids an allowance with after-tax dollars. Hire them in your business, deduct the wage, and let them earn up to $14,600 tax-free.
A guide by Taxstra Tax & Accounting — CPA-led tax strategy for business owners
The Most Expensive Way to Raise Kids
Funding your children's lives with money the IRS already taxed
Most parents pay for their children's expenses—sports, clothes, cars, college savings—from their personal bank account.
The problem? You funded that account with money the IRS already taxed.
The 37% Tax Bracket Reality
To give your child $1.00, you must earn $1.58. The IRS takes the first $0.58. You keep the dollar. Over 18 years, you are leaking tens of thousands of dollars to the IRS unnecessarily.
Hiring your kids reverses the flow. Instead of earning income at your bracket, paying tax, and then handing your child what's left, the business pays your child directly for real work. The business deducts the wage. The child—not you—reports the income. And because of how the standard deduction works, the child usually owes nothing.
This is not a gray-area trick. It's a well-established strategy the IRS allows when it's done correctly, and a well-documented disaster when it's done sloppily. The whole game is in the execution, which is what the rest of this page covers.
How the Income Shift Works
Moving dollars from your top bracket to your child's 0% bracket
By hiring your child, you move income from your high bracket to their 0% bracket (thanks to the Standard Deduction).
| You (Parent) | Your Child | |
|---|---|---|
| Marginal tax rate on the income | 37% + state | 0% (sheltered by standard deduction) |
| Max tax-free wages (2025 limit) | — | $14,600 per child / per year |
| Result for the business | Full wage deduction | — |
The mechanics: the standard deduction fully shelters a dependent child's earned income up to the annual limit, so wages up to that amount generate zero federal income tax on the child's return. Meanwhile, every dollar of wage is an ordinary business deduction for you.
A worked example
A sole-proprietor consultant in the 32% bracket pays her 14-year-old $12,000 this year for documented scanning, filing, and social media work. The business deducts $12,000, saving roughly $3,840 in federal income tax — plus self-employment tax savings on top, since the deduction also reduces Schedule C net earnings. The child owes $0 federal income tax because the standard deduction covers the full wage. Run your own numbers with our Hiring Kids Calculator.
Want the exact figure for your bracket, your state, and your number of kids? Use the Hiring Your Kids Tax Savings Calculator — it models the income shift, the payroll-tax treatment for your entity type, and the Roth IRA layer in about two minutes.
Do It Right. Or Don't Do It.
The IRS allows this, but they scrutinize it. It must be a legitimate employer-employee relationship.
Real Work
The work must be necessary for the business. Examples: cleaning the office, shredding documents, social media management, acting as a model for website photos, data entry.
Reasonable Pay
You must pay them a market rate for what they do. The rule: you cannot pay a 7-year-old $100/hour to empty the trash. You can pay them $15/hour.
Paper Trail
Treat them like any other employee. Must haves: valid W-4, I-9, job description, timesheets, and payment via check or direct deposit (no cash).
Why so much emphasis on documentation? Because in the cases the IRS wins, the facts are always the same: round-number payments with no timesheets, wages that bounce back into the parents' account, "jobs" no unrelated employer would pay for, and nothing in writing. In the cases taxpayers win — including the case law allowing children as young as seven — the family ran it like real payroll. Be the second kind of family.
The wage must actually leave your control
Paying your child and then using the money for groceries or the mortgage undoes the strategy — those are expenses you're legally obligated to cover anyway. The wages belong to the child: their Roth IRA, their college fund, their savings, their spending. Keep the money's path clean and the strategy holds.
The Million Dollar Baby (Roth IRA)
The tax savings today are great. The wealth building for tomorrow is life-changing.
Because your child now has "Earned Income," they are eligible to contribute to a Custodial Roth IRA.
If you pay them $7,000 a year (tax-free) and put it all into a Roth IRA starting at age 10:
- They pay $0 tax on the money going in.
- It grows tax-free for 50 years.
- They withdraw it tax-free in retirement.
Compound Interest Magic
Total contributions from age 10–18: $56,000. Value at age 60 at an 8% assumed return: $1,500,000+. You just made your child a tax-free millionaire for less than the cost of a luxury SUV. (Illustrative projection — returns are not guaranteed.)
Two guardrails: Roth contributions are capped at the child's earned income for the year (or the annual IRA limit, whichever is lower), so the wage has to come first and be documented. And the Roth doesn't have to wait for retirement to be useful — contributions (not earnings) can be withdrawn at any time without tax or penalty, which makes the account a surprisingly flexible head start on a first home or other major goals.
Pair this with a 529 plan if college is the priority — the two accounts solve different problems, and high-income families often run both. See our guide to 529 superfunding for the other half of that conversation.
The FICA Exemption
Sole prop or partnership? You get an extra perk: zero payroll taxes.
If your business is a Sole Proprietorship or a Partnership owned solely by parents, the wages you pay your children get special payroll-tax treatment:
- Age under 18: exempt from Social Security and Medicare taxes (FICA). This saves you another 15.3%.
- Age under 21: exempt from Federal Unemployment Tax (FUTA).
| Your Entity | FICA Treatment | FUTA Treatment | Bottom Line |
|---|---|---|---|
| Sole Proprietorship / Spousal Partnership | Exempt under age 18 — no Social Security or Medicare | Exempt under age 21 | Maximum benefit — wages avoid income tax AND payroll tax |
| S-Corp or C-Corp | Must withhold FICA (15.3%) at any age | FUTA applies | Still a win — income tax savings usually outweigh the payroll tax cost |
If you are an S-Corp or C-Corp, you MUST pay payroll taxes — but the income tax savings usually still outweigh the payroll tax cost.
The family management company workaround
Some S-Corp owners set up a separate parent-owned sole proprietorship (a 'family management company') that hires the kids and bills the S-Corp for their services, preserving the FICA exemption. It can work, but it adds an entity, real invoicing, and real scrutiny — this is a structure to implement with a CPA, not a weekend DIY project.
Setting Up Payroll Correctly
The five steps that make the strategy audit-proof
- Put the job in writing. A one-page job description per child: duties, hourly rate, expected hours. Match the duties to the child's actual age and ability.
- Run real payroll. Collect a W-4 and I-9, pay on a regular schedule from the business account, and issue a W-2 in January. Even when no income tax is due, a W-2 is what proves wages were wages.
- Track the hours. A simple timesheet — date, task, hours — kept contemporaneously. Ten minutes a week of logging protects the entire deduction.
- Deposit to the child's account. An account in the child's name (custodial is fine). From there, fund the Roth IRA, college savings, or the child's own spending.
- Check state rules. Most states exempt a parent's business from child labor restrictions for the parent's own children, but state registration, withholding, and workers' comp rules vary. We confirm this state-by-state for clients.
None of this is hard. It's about an hour of setup and a few minutes a week of maintenance, in exchange for thousands of dollars per child, per year, plus a head start on your child's retirement that almost nobody their age will have.
Hiring Kids FAQ
The questions parents ask us most
Start Their Legacy.
Let's set up a compliant hiring plan and open those Roth IRAs. It's the best gift you can give them. The 30-minute discovery call is free.
Find Out What You're Overpaying in Taxes
Book a free 30-minute call to walk through your situation. We'll tell you exactly how our CPA-led team can help — and whether we're the right fit.