How to Hire Your Kids and Save Thousands in Taxes

One of our TaxElm members gave his three teenage sons their first paychecks. 

Not as an allowance, but as real employees of his business. 

That one decision saved him over $12,000 in taxes that year, and it’s totally legal. 

Most business owners don’t realize the IRS allows them to legally pay their children and take a full business deduction for it. When done correctly, this simple family payroll strategy can save thousands in taxes each year while teaching your kids real financial skills.

Here’s how it works and how to document it correctly.

What It Means to Hire Your Kids

The IRS lets business owners pay their children for real work performed in the business. That income can be completely tax-free to the child if their total earnings stay under the standard deduction limit (about $15,000).

Meanwhile, the business takes a full deduction for the wages, lowering taxable income. It’s a win for both sides. Your kids earn money tax-free, and your business saves on taxes.

If you operate as a sole proprietor or single-member LLC, there’s an added bonus: wages paid to children under 18 are exempt from Social Security and Medicare taxes.

Why This Strategy Works

Hiring your kids shifts after-tax spending into pre-tax spending.

You’re already supporting your kids through sports, school, and activities. By hiring them to work in your business, those same costs can be covered with pre-tax dollars instead of post-tax income.

You also teach them valuable life skills: Work ethic, money management, and an early understanding of business and taxes.

Who Can Use It?

• Sole proprietors
• Single-member LLCs
• Partnerships where both partners are parents of the child
  
  

S Corporations can also benefit, but they must withhold payroll taxes or use a simple workaround (covered below).

How to Do It Correctly

The IRS fully allows this, but you need documentation. Follow these basic steps:

1. Kids must be age 7 or older.
   
   
2. Pay a reasonable wage. Match the pay to the work and skill level.
   
   
3. Keep time and task records. Track hours and what they did.
   
   
4. Pay into their own account. Use a custodial or personal account in their name.
   
   
5. Issue a W2 at year-end. Even if the taxes withheld are zero.
   
   

With these records in place, you can defend the deduction if ever reviewed.

Bonus Strategy: Start a Roth IRA

Kids who earn W2 income can contribute to a Roth IRA.
If they invest $5,000 per year for five years, that $25,000 could grow to over $1 million by retirement, all tax-free.

It’s one of the most powerful wealth-building opportunities available for families.

What About S Corps?

If you operate as an S Corporation, you must withhold payroll taxes. But there’s a workaround:

• Set up a small part of your business (such as consulting or royalties) under a sole proprietorship or Schedule C.
• Pay your kids through that entity to avoid FICA taxes.
  
  

You can also hire older family members like grandkids or nieces using similar documentation.

TLDR:

Hiring your kids is an IRS-approved, fully legal tax strategy that helps you save money and teach your children responsibility.

Just make sure you:

• Pay them for real work
  
• Keep clear records
  
• Pay them through their own account
  
• File proper payroll forms
  
  

When done right, your business saves thousands, your kids learn valuable lessons, and your family builds generational wealth.

👉 Download the free Tax Savings Starter Kit at TaxSavingsPodcast.com/starterkit to learn how proactive planning helps business owners save $10,000 or more each year.

Transcript

[00:00:00] Introduction: The Power of Hiring Your Kids

[00:00:00] Mike J: A few years ago, a member of Taxo gave his three teenage sons their first paycheck from the business owner. Not as a gift, but as a legal employee of his business. That one decision seemed to have over $12,000 in taxes that year, and it wasn't even that hard to do. But here's the crazy part. Most business owners don't even know what they can do this, and worst, some who try to do it.

[00:00:22] End up doing it completely wrong and triggering audits. So what I'm gonna do today is break down the real story of how to legally hire your kids and turn your business into the ultimate family wealth engine.

[00:00:32] Can You Legally Hire Your Kids?

[00:00:32] Mike J: So the first question that always comes to mind, is, can you really hire your kids?

[00:00:37] In your business. And the answer is yes. And it's not just legal, it's smart, but it needs to be done right? And you might hear from TikTok videos and all of our social media that make this sound all great, but they leave out missing parts to ensure that you can defend it. And we're gonna dig into that.

[00:00:53] So you might hear a TikTok that says, yeah, just pay your kids $15,000 a year. They pay no taxes on it. Perfect. Move on forward. And while that may be possible, the actual ability of doing it takes a little bit more effort than that. Now, it's not hard. It's not that crazy and it's gonna be super beneficial, but we just need to make sure we're doing things correctly, and that's exactly what we're gonna dive into today.

[00:01:13] Tax Benefits of Hiring Your Kids

[00:01:13] Mike J: The second question pops up is why even do this? Why even spend the time and the effort to do this? Two different reasons, tax purposes, and a teaching aspect. So let's go through tax purposes. In this concept, your business gets a tax deduction, reducing your taxable income, and your kids potentially receive income tax free.

[00:01:31] They don't pay taxes. On that income that they receive. And also, often I always talk about this concept of maximizing deductions or after tax versus pre-tax spending. And how do we move after tax spending money that we spend after it's been taxed into pre-tax spending that we do prior to those funds being taxed.

[00:01:48] And this is a great example of that. We're gonna support our kids. No matter what, we're gonna pay for them to go to amusement parks with friends, or we're gonna pay for their basketball camps, their baseball camps, their volleyball camps, whatever it might be. We're always gonna be supporting our kids in various different extracurriculars, but typically that comes from after tax funds.

[00:02:06] We make money in our business, we pay taxes on it, and then we go fund that basketball camp, that volleyball camp, whatever it might be. But this is a great example of how we can turn after tax spending into pre-tax spending. Find something our kids can do legally inside our business. Pay them for that work.

[00:02:22] And then they can take those funds that we paid them pre-tax funds and they pay no income taxes on it potentially. And then they go pay for that basketball camp. So that's the beauty behind it from a tax perspective. 

[00:02:33] Teaching Life Skills Through Business

[00:02:35] Mike J: And then the other perspective is a teaching perspective and I love this aspect and it's so powerful.

[00:02:37] I've heard so many stories about how this concept has worked in families. But you're teaching kids real skills and this work ethic and learning that they need to work for a living. That learning this ability of I do work and I get paid and how that process works. And you can start that at such a young age.

[00:02:53] Not only that, so many people have businesses that they eventually likely will pass down to their kids at some point in time. What better way to get your kid intertwined? Into your business at an early stage and they can understand it. And they might say, I want nothing to do with that business. Or they might dive full in and be like, I want everything to do with this business.

[00:03:10] This is a great opportunity. Just test the waters. And it's not a full-time employee, it's not working full-time hours, but it's starting to get them into that routine. 

[00:03:18] IRS Guidelines and Legal Requirements

[00:03:21] Mike J: All right, so let's talk about Iris guidelines of this and why this is so important and what the Iris says about it.

[00:03:24] And if you have someone that says this is gray area, don't do this. There is specifically in the IRIS code, the IRIS specifically talks about this and the benefits. And I'm gonna read you from the Iris website that they talk about hiring, indicates they say payments for the services of a child under the age 18 who works for his or her parent.

[00:03:43] In a trader business are not subject to social security and Medicare taxes. If the trader business is a sole proprietorship or a partnership in which each partner is a parent of the child. The IRS specifically talks about paying your kids under the age of 18 in your business and also gives us an added tax benefit that we normally wouldn't have for a typical employee.

[00:04:03] So this is black and white in the tax code. Now we still need to do things correctly, but paying your kids is not some out there outlandish thing. This is real strategy. Again, we just gotta make sure we do it correctly. So essentially, if you pay a child under the age of 18 via a Schedule C or a single member LC.

[00:04:21] You do have no social security or Medicare, AKA FICA withholding that you need to do. And if your child's total income for the year is under the standard deduction for the year, whatever that might be, they pay no income taxes on that. And so example, I think the standard deduction this year is right around $15,000.

[00:04:37] So if your child, hypothetically, was under the age of 18 and you paid them out of a Schedule C, single member, LC business, sole proprietorship business, you paid them $15,000 as an example, you wouldn't have to withhold for FICA taxes, social security, and Medicare, and they would pay no income taxes on that as long as their total income.

[00:04:54] Was under that standard deduction, that $15,000, and so a true business deduction and kids pay no income taxes. Now we're gonna run through some real numbers later and some tricks and things we need to do this correctly. So I'm not saying pay your kids $15,000 and max it out. I'm just showing you for an example of how that works.

[00:05:12] Now, one thing that you'll notice is that we said single member LC. Not S corporation. So if you're an S Corporation owner, we'll talk later about some options that you have as an S-Corp owner. But essentially, in order to avoid FICA taxes, that Social Security Medicare tax, they had to be paid out of a single member LC.

[00:05:27] If you're as an S corporation, we'd have to do some type of workaround for that. Now quick break. You know earlier when I mentioned that one small strategy saved a member over $12,000 in taxes we actually pulled together a whole starter kit of these kinds of strategies. It's totally free and it includes our master list of tax deductions.

[00:05:45] It includes real case studies from clients who saved 5,000 to $25,000 or more. It also includes a bonus discovery call to help you do the exact same. You can grab it right [email protected] slash starter kit. Again, one more time. That's tax savings podcast.com/starter kit. 

[00:06:04] Proper Setup for Hiring Your Kids

[00:06:04] Mike J: Alright, so let's go back into this, and I wanna talk about the proper setup in order for this whole concept of hiring our kids to be legal and stand up against the IRS.

[00:06:13] It's gotta be done correctly. You cannot just pay your kids a set amount outta your business without any backup. And I hear so many people that do this so often where they just say, oh, 15,000 to each kid, seven years old, I don't care. 15,000 to each kid. And they just go along with that. We cannot do that.

[00:06:28] We need to make sure we have backup, we have to be doing real things. And we're gonna talk about what some of those requirements are. Now, first one is must be age seven or older. Now we've had clients, we have members in Taxo that hire under the age of seven, but seven is something that's been proven and accepted in tax court.

[00:06:45] So if they're under the age of seven, so that can be a much lower amount, and we need to have really good background. What that is. Typically, that's gonna be like a modeling or something like that. They're showing up on billboards for your business, or they're showing up in commercials that you're doing, and we're paying 'em $500, $600.

[00:06:57] There's something commemorate to what they're doing, but we can't pay. A 4-year-old, a whole ton. There's not much that much a four year-old can do in our business. Depending on your business. So typically we say, when does this really start to come into play? Typically, once you're hitting that seven years or older.

[00:07:13] Number two, you must pay a reasonable wage for the type of work that they're doing in the business. So reasonable wage for the type of work that they're doing, based on their experience, based on the type of work they're doing. So we can't, if we're gonna pay someone to cut our lawn, we're gonna pay them 60 bucks an hour.

[00:07:29] We're probably not paying our child 60 bucks an hour because one, they're not a professional. Two they're much younger than that. So we want to factor in based on their experience, where they're at, the type of skillset that they have, what is a reasonable rate for that? We must pay them a reasonable wage for the type of work they're doing.

[00:07:46] Third piece, we wanna track the time to record the actual work that they're doing to support the deduction. So track in what days are they working, how many hours are they putting in, what tasks are they doing? Do we have support to back up the actual work that they're doing? Next we're gonna pay them to, we're gonna pay that amount to that child in account in their name.

[00:08:04] So it's, we have to pay, make the payment from the business to an account in our child's name. Now that can be a Roth I a, that can be an account that a custodial account that we have control over till they his certain age, but it's gotta be to an account in their name. We can't just. Write ourselves a paycheck and say, oh yeah, that's for Johnny, or that's for Mary's work they're doing.

[00:08:20] It has to be an account in the child's name. Next, we need to prepare a W2 at year end. Now that W2 is gonna have a lot of zeros in it, likely because especially we're paying 'em out of single umbrella C. And if they're under a standard deduction, there's gonna be no social security taxes, no Medicare taxes, no federal withholding.

[00:08:35] So it's just gonna have an item in box one. And depending on what state you're at, there might be some state withholding. Now the standard deduction for the federal. $15,000 for the state, it might be different. So there might be some state withholding that has to be factored in. But the federal side, that W2 is gonna be a lot of zero numbers.

[00:08:52] And then finally, just have required documentation. Have a job description or employment agreement a sheet that's tracking. What tasks they're doing, how many hours they're spending, the dates of that. Something that you can use to prove that you made a payment to the account in their name. And then obviously the W2.

[00:09:05] And in tax zone we have a full implementation module that has all these documents, samples that help you ensure that you. If you're implementing the strategy, which I think everybody with kids should implement this to some extent, but if you're implementing the strategy, we have a bunch of templates, downloads, things to make sure you're dotting your, i's crossing your T's, and doing things right.

[00:09:22] Real-Life Examples and Numbers

[00:09:22] Mike J: We have that directly within our implementation module for this strategy in within tax L. So let's go through some real numbers. Let's say that you're an attorney and you have a 9-year-old and a 15-year-old, and let's say that your 9-year-old is gonna do some mail management for you and your 15-year-old is gonna do some social media management.

[00:09:41] It's that 9-year-old doing mail management. Maybe they're stuffing envelopes. They're checking, grabbing things in, they're scanning things that are coming in. Let's say you're doing some mail management, and let's say you're paying them $12 an hour and they're working six hours a week. That's roughly $3,700 for the year.

[00:09:55] Let's say you're 15 year olds doing social media management. They're work. You're paying them $20 an hour and they're working about eight hours per week. That's $8,300 that year. So this is a real legit thing, a real strategy, real case study that we've seen somebody use. Again, we're not necessarily maxing out to 15,000 out there doing the work, and they're paying them a reasonable rate to make that happen.

[00:10:15] Let's not avoid it, but we don't have to, we're not automatically 15,000 up to the max for every child because we need the proof to help back that up. So in this example. 9-year-old, paying 'em about $3,700 a year, the 20, the 15-year-old, or paying 'em about $8,300 a year. If you are in the 37% tax bracket, you're gonna see $4,500 in tax savings simply from this.

[00:10:37] Now, these are super conservative numbers. We can go much higher than this. Again, depending on the rate that's reasonable in your area based on the work they're doing and how many hours that they're putting it in. But the big thing is we need to set it up correctly. We need to make sure we have that documentation on file.

[00:10:52] Okay, so let's go through some bonus benefits. 

[00:10:55] Bonus Benefits: Funding a Roth IRA

[00:10:55] Mike J: 'cause this is the after tax versus pre-tax spending, the business deduction, not taxable to them. Obviously that's a great benefit, but there's even more that I like to talk about when we talk about hiring our kids. And the first one is this concept of funding a Roth IRA.

[00:11:08] Now, in order to fund a Roth IRA, you need earned income. And now that you're paying your kids W2 wages, they have. Earned income. Now the problem with a Roth IRA is that you don't get a tax deduction going in, but it grows tax free and has withdrawal tax free in retirement. The problem with a traditional account is you get a tax deduction going in, grows tax deferred, and B get tax when you pulled out with.

[00:11:30] The problem with the Roth is you don't get a tax deduction when you go in, but if your kids understand standard deduction, they don't need the tax deduction. So it can be super powerful to take that earned income that you're now paying them. Put it into a Roth IRA and let that thing grow. Now, the beauty around Roth two is that you can access principal amounts prior to retirement, no questions asked.

[00:11:48] No tax, no penalty. So let's run us through some quick numbers. Let's say that you paid your, or you funded a Roth IRA with payments that you were paying to your child. You funded $5,000 for five years straight, so a total of $25,000 and no more at the age of 65 with an 8% return. That would be worth over a million dollars.

[00:12:08] Think of the power behind that. Now, let's say that same child, you put $25,000 in there. Let's say they get to college and they need some funds. Now, obviously we'd say try to fund that outside of it. Let that thing grow tax free and tax and tax free withdrawals in retirement. But let's say they really hit a time crunch.

[00:12:24] We don't have funds otherwise we need to pull money out. That $25,000 principle that you put into that Roth area. You can withdraw tax free. No, no penalties, no questions asked. But again, I'd rather see that thing grow. You fund it for five years. $5,000, $25,000, potentially worth over a million dollars depending on the rate of return of that.

[00:12:42] Think of the power of that. 

[00:12:45] Special Considerations for S-Corp Owners

[00:12:45] Mike J: Finally, let's talk about that S-corp. We talked about S-Corp a little bit. If you operate as an S corp, you are not considered a sole proprietorship or a partnership, so you would need to be withholding. Social Security and Medicare taxes. From the payments that you're paying your children, that's roughly 15%.

[00:12:59] So you pay your child 10,000, roughly 15% would need to be paid in spica, taxes, social Security, and Medicare. Now this would all of course, still be considered a business expense. It's just some additional tax that might not be necessary. So within tax sale, we talk about a workaround and how do we get about this?

[00:13:17] Can we pull some of your business apart? And move it into a Schedule C. And then can we pay your kids outta that schedule C or that sole proprietorship? So let's say you had a consulting business that made a ton of money, but then you audit a book. You wrote a book, and you're making some good money from the book, but nothing too crazy.

[00:13:32] Could we pull part of your business into a Schedule C business and hire your kids outta there where it is? Considered a sole proprietorship or do you have rental properties and can we pay your kids outta rental properties? A lot of different planning opportunities. We talk about them within tax home, but just know if you're paying them outta the ass corporation, you do have to withhold for FICA taxes.

[00:13:50] Also, hiring family members that are not your children, so think of things like grandkids, nieces, nephews, things like that. Another similar type of workaround that we talk about within Tax Elm. 

[00:14:02] Conclusion: Building Generational Wealth

[00:14:03] Mike J: Okay, so let's wrap up what we talked about. This is a very real and a powerful strategy, and a true after-tax versus pre-tax scenario that we love to talk about.

[00:14:11] And I think everybody with kids over the age of 17, under age 18 should be doing this. Now, if your kids are over the 18, we're looking at the strategy completely different. So just know that this is for kids between ages seven and under the age of 18. But the key thing with the strategy is you gotta do it right.

[00:14:27] You need to pay them a reasonable wage based on the work they're doing and their experience. They must be doing actual work for you, and you must be tracking that. You need to pay it to an account in the child's name. You need to send a W2 at your end and just have required documents, a time sheet basis for the rate that you're paying them.

[00:14:43] What are you basing that, that reasonable rate on? How are you finding that copy of that W2, things like that. So if you take just one thing from today's topic, let it be this, your business. Isn't just a source of income, it's a tool to build generational wealth In hiring your kids isn't just about the tax break, it's about teaching them responsibility, money, skills, and creating a true legacy.

[00:15:05] So go grab that IRS form, check with your tax professional and start the process today because in 10 years you'll wish you started hiring your kids today. Now, if you found this helpful, don't forget to hit subscribe, hit that like button and share it with a business owner who's sick. Of paying too much in tax.

[00:15:20] And if you want help from our team of tax professionals implementing this strategy along with implementation modules, templates, downloads everything else to make it easy along with so many other different tax strategies, visit us at Tax Elm. That's T-A-X-E-L m.com, or click the link in the description for a free discovery call.

[00:15:36] We are helping people like you legally lower your tax bill every single day. Thanks for tuning in, and I'll see you on the next one.