How the Hire Your Kids Tax Strategy Works

The strategy of hiring your children allows business owners to lower their taxable income by paying them for real work performed. This approach provides the child with work experience and income while generating a legitimate business expense for the parent’s company. This can shift income from the parent’s higher tax bracket to the child’s lower, or even zero, tax bracket. The arrangement is a recognized method for family businesses to manage their tax liability while teaching children about financial responsibility.

Core Requirements for Legitimate Employment

For wages paid to a child to be a valid business expense, the employment must be legitimate. The work performed must be ordinary and necessary for the business, meaning it is common and helpful for that trade. Personal chores, like mowing the family lawn, do not qualify, but tasks like cleaning the office, filing documents, or managing social media accounts do.

The compensation paid to the child must be reasonable for the services rendered, meaning the wage should be consistent with what you would pay an unrelated person for the same work. To determine a reasonable rate, research market rates for similar positions in your area. Paying a child an excessive salary for simple tasks is a red flag for the IRS and could lead to the disallowance of the wage deduction. Keeping records of how the pay rate was determined can help substantiate its reasonableness.

While the IRS does not set a minimum age for employing a child, they must be capable of performing the assigned duties. The credibility of the employment arrangement depends on the child’s ability to genuinely complete the work. For instance, it is plausible for a teenager to handle social media or office cleaning, but it would be difficult to justify paying a young child for complex bookkeeping services.

Tax Implications Based on Business Structure

The tax benefits of hiring a child vary based on the business’s legal structure. For unincorporated businesses, like sole proprietorships or partnerships where the only partners are the parents, the advantages are most substantial. When a child under 18 is employed by such a business, their wages are not subject to Social Security and Medicare (FICA) taxes. Wages paid to a child under 21 by these entities are exempt from Federal Unemployment (FUTA) taxes, providing a direct tax saving for the business owner.

The situation changes for incorporated businesses like a C-Corporation or an S-Corporation, as the FICA and FUTA tax exemptions do not apply. The corporation must withhold the employee’s share of FICA taxes and pay the employer’s share on the child’s wages, regardless of age. While the wage is still a deductible business expense, the lack of the payroll tax exemption reduces the overall tax savings.

The income your child receives is considered earned income. A child can earn up to the standard deduction amount for a single individual without owing federal income tax, provided they have no other income. For 2025, this amount is $15,350. Because the wages are earned income, the child is also eligible to contribute to a Roth IRA, a powerful tool for early retirement savings.

Required Documentation and Recordkeeping

To establish a formal employment relationship, specific documentation must be maintained. Before placing a child on payroll, the business must obtain their Social Security number for all tax reporting purposes.

The business must have the child complete Form I-9, Employment Eligibility Verification, to confirm their identity and authorization to work in the U.S. The child must also fill out a Form W-4, Employee’s Withholding Certificate, to guide the employer on federal income tax withholding. A child who expects to earn less than their standard deduction can often claim “exempt” on their W-4, meaning no federal income tax will be withheld.

Maintaining detailed internal records is also necessary to prove the validity of the employment. A formal employment agreement should be drafted, outlining the child’s job title, duties, and rate of pay. Meticulous timesheets or work logs must be kept, documenting the dates and hours worked along with a description of the tasks performed.

Payroll and Payment Procedures

Once documentation is in place, follow standard payroll procedures. Use timesheets to calculate gross pay and the Form W-4 to determine federal income tax withholding. It is important to pay the child using a formal method, such as a business check or direct deposit into a bank account in the child’s name. Avoid paying in cash, as it creates no paper trail and can appear less legitimate during an audit.

At the end of the year, the business must complete its payroll reporting obligations by issuing a Form W-2, Wage and Tax Statement, to the child. The W-2 reports the total wages paid and any taxes withheld. A copy of this form is also filed with the Social Security Administration.