How Hiring Your Kids in Your Family Business Can Reduce Taxes — Legally and Effectively

If you run a family business—especially a sole proprietorship or a partnership where both partners are the parents—there is a powerful and completely legal tax strategy that often goes overlooked: hiring your children to work in your business.

This is not a loophole. It’s directly supported by IRS rules as long as the work is real, the pay is reasonable, and the business structure qualifies. When done correctly, this strategy shifts income into a lower tax bracket, reduces payroll taxes, helps fund your child’s future, and strengthens family financial literacy.

Why Hire Your Child? The Tax Advantages

When your child performs legitimate work for your business, several tax benefits become available:

1. You Can Deduct Their Wages as a Business Expense

The wages you pay your child are a valid business deduction—just like paying any employee. This reduces your taxable business income.

Meanwhile, your child receives that income in their lower tax bracket—often 0% income tax if they stay under the annual standard deduction threshold (e.g., ~$15,000 for 2025).

Example:
You pay your child $10,000 per year to help with administrative tasks, marketing support, or filing.

• Your business deducts the $10,000 → lowering your taxable income.

• Your child pays no federal income tax on that income (as long as they are below the standard deduction).

• The family, collectively, pays less tax.

2. No Social Security or Medicare (FICA) Taxes If Your Child Is Under 18

In a sole proprietorship or parent-owned partnership, wages paid to your child under age 18 are exempt from FICA taxes.

That means both you (the employer) and your child (the employee) avoid 15.3% in payroll taxes.

This is a built-in savings just for being structured as a family business.

3. No Federal Unemployment Tax (FUTA) If Your Child Is Under 21

Again—only in the case of a sole proprietorship or a partnership owned solely by the parents—your child’s wages are not subject to FUTA until age 21.

This saves even more in unnecessary payroll tax.

4. Your Child Can Earn Tax-Free Income

If your child earns less than the standard deduction (around $15,000 in 2025, updated annually), they will pay zero federal income tax.

This is how income shifts from your higher bracket to their lower (or zero) tax bracket—with the IRS’s blessing.

5. You Can Use Their Earned Income to Fund a Roth IRA

Once your child earns legitimate income from the business, they are eligible to contribute to a Roth IRA.

• They pay no tax on the contribution now (they’re in a zero tax bracket).

• It grows tax-free.

• They can withdraw it tax-free in retirement.

Even a few years of Roth IRA contributions as a teenager can grow to six figures over time.

6. Helps With College Financial Planning

When students contribute to their own savings, certain college savings credits and aid formulas can be more favorable.

Plus, they learn the value of money and budgeting early.

What Kind of Work Can Your Child Perform?

The work must be real, age-appropriate, and necessary for the business. Examples include:

• Social media management

• Filing or organizing office materials

• Customer service support

• Cleaning, maintenance, or shop assistance

• Photography or content creation

• Packaging and shipping items

• Event setup or breakdown

If you would pay another employee to do it, you can pay your child to do it.

Important Compliance Requirements

To ensure this strategy is fully legal:

✅ The work must be legitimate and documented
✅ The pay must be reasonable for the tasks performed
✅ Keep time sheets, job descriptions, and payroll records
✅ Issue a W-2 at year-end (even with no tax withheld)
✅ The business must be a sole proprietorship or a parent-only partnership
(This does not apply the same way to corporations.)

What If Your Business Is a Corporation?

If your business is structured as an S-Corp or C-Corp, your child’s wages are subject to standard payroll taxes, so some of the FICA and FUTA advantages won’t apply.
However, the wage deduction and Roth IRA benefits still remain, so the strategy is still valuable—just not as tax-efficient.

Final Takeaway

Hiring your children in your family-owned business is 100% legal, financially smart, and a meaningful way to teach responsibility and financial stewardship.

You can:

• Reduce your taxable income

• Avoid payroll taxes

• Provide your child tax-free income

• Jumpstart their retirement savings

• Support future education planning

This is one of the rare tax strategies where everyone wins.

If you’d like help structuring this correctly—or want us to outline specific wage levels, job descriptions, and Roth IRA setup—we can walk you through the entire process to ensure full IRS compliance.

Ready to implement this?
Let’s get your family benefiting from your business — the smart, legal, financially strategic way.