One of the most overlooked tax strategies for business owners is sitting right in your living room: your children.

No, I’m not talking about child labor. I’m talking about a completely legal, IRS-approved strategy that lets you:

•Reduce your business’s taxable income

•Keep the money in your family

•Pay little to no taxes on that income

•Build your children’s financial foundation

•Teach real-world business skills

It sounds too good to be true, but thousands of business owners use this strategy every year. Here’s exactly how it works and how to do it right.

The Basic Strategy Explained

When you hire your child as a legitimate employee in your business:

What Happens:

1.You pay them a reasonable wage for actual work

2.Their wages are a business expense deduction for you

3.Their income (up to $13,850 for 2024) is covered by the standard deduction

4.They pay $0 in federal income tax on that amount

5.The money stays in your family

Think of it like this: Instead of paying the IRS $3,000 in taxes, you pay your daughter $10,000, she pays $0 in taxes, and you’ve just transferred $10,000 within your family tax-free.

Real Example:

Before Strategy:

•Your business profit: $60,000

•Your tax bill (25% effective rate): $15,000

•Money left: $45,000

After Strategy:

•Your business profit: $60,000

•Pay your son $12,000 for legitimate work

•New taxable profit: $48,000

•Your tax bill: $12,000

•Your son’s tax bill: $0

•Money kept in family: $3,000 more than before

•Plus your son now has $12,000 for college, Roth IRA, or savings

What Makes This Legal?

The IRS is fine with hiring your children if you follow specific rules:

Rule 1: The Work Must Be Legitimate

Your child must perform actual work that serves a legitimate business purpose. You can’t just write them a check for doing nothing.

Rule 2: The Pay Must Be Reasonable

You can’t pay your 12-year-old $100/hour to file papers. The wage must match what you’d pay a non-family member for the same work.

Rule 3: You Must Document Everything

Just like any employee, you need:

•Written job description

•Timesheets or work logs

•Regular paychecks (not lump sums)

•Proper tax forms (W-2 or 1099, depending on age and business structure)

Rule 4: The Child Must Actually Perform the Work

Your 5-year-old isn’t managing your social media. Be realistic about age-appropriate tasks.

Age-Appropriate Jobs

Ages 7-10:

•Filing and organizing (paper or digital)

•Cleaning office or workspace

•Shredding documents

•Stuffing envelopes for mailings

•Organizing inventory

•Appearing in marketing photos/videos

•Simple data entry (with supervision)

Reasonable Pay: $10-15/hour

Ages 11-14:

•All of the above, plus:

•Basic social media posting (with your oversight)

•Answering phones/taking messages

•Product photography

•Packaging/shipping assistance

•Running errands (with supervision)

•Basic bookkeeping/data entry

•Website content updates

Reasonable Pay: $12-18/hour

Ages 15-17:

•All of the above, plus:

•Social media management

•Content creation (blogs, videos, graphics)

•Customer service

•Bookkeeping

•Marketing campaigns

•Website maintenance

•Trade assistance (construction, cleaning, etc.)

•Delivery and errands (if they can drive)

Reasonable Pay: $15-25/hour

Ages 18+:

•Pretty much any business task

•Can be hired as independent contractors

•Can work in more specialized roles

•Can earn higher wages

Reasonable Pay: Market rate for the position

How Much Can You Pay Them?

The Sweet Spot: Up to $13,850 (2024 Standard Deduction)

Why this number? Because of the standard deduction.

•If your child earns $13,850 or less, they can take the full standard deduction

•Their taxable income becomes $0

•They pay $0 in federal income tax

•You still get the full business deduction

Can you pay them more? Yes, but they’ll start owing taxes on amounts over $13,850.

Example:

•Pay your child $20,000

•First $13,850: Tax-free (standard deduction)

•Remaining $6,150: Taxed at 10% = $615 in taxes

•Still better than YOU paying 25%+ on that $20,000

Special Rules for Young Children (Under 18)

If your child is under 18 and works in your sole proprietorship or partnership (where both parents are partners):

Benefits:

•No Social Security/Medicare taxes (saves you 15.3%!)

•No federal unemployment tax

•They just get a W-2 at year-end

This doesn’t apply if:

•Your business is a corporation (C-Corp or S-Corp)

•Your child is 18 or older

•Your child works for someone else’s business (even a family member who’s not their parent)

Documentation You MUST Keep

The IRS will question this if audited, so document everything:

1. Job Description (Written)

Example:

“Sarah Johnson, Social Media Assistant

Responsibilities: Create 3 social media posts per week, respond to comments, schedule content in Profitlifter, track engagement metrics

Hours: 5 hours/week

Rate: $15/hour”

2. Timesheets

Every pay period, track:

•Date worked

•Hours worked

•Tasks completed

•Child’s signature (if old enough)

•Your signature

3. Work Samples

Save examples of their actual work:

•Social media posts they created

•Photos they took

•Files they organized

•Content they wrote

4. Regular Paychecks

•Pay them on a schedule (weekly, bi-weekly, monthly)

•Use business checking account

•Write “wages” in the memo line

•Keep copies of all checks or electronic transfers

5. Tax Forms

•W-2 if they’re an employee

•1099-NEC if they’re over 18 and working as a contractor

•Keep all forms for at least 7 years

The Roth IRA Power Move

Here’s where this strategy becomes generational wealth:

Once your child has earned income, they can contribute to a Roth IRA.

How It Works:

•Your child earns $10,000 from your business

•You (or they) contribute $7,000 to a Roth IRA in their name

•That money grows tax-free for decades

•They can withdraw it tax-free in retirement

The Math:

•$7,000 invested at age 12

•Growing at 8% annually

•Worth $147,000 at age 65

•All tax-free

Do this every year from age 12-17 (6 years):

•Total invested: $42,000

•Value at age 65: $882,000

•All tax-free

You just funded your child’s retirement before they graduate high school.

Common Mistakes That Trigger Audits

Mistake 1: Paying Unreasonable Wages

❌ $50/hour for a 10-year-old to clean the office

✅ $12/hour for legitimate cleaning work

Mistake 2: No Documentation

❌ “My kid helps out sometimes”

✅ Detailed timesheets, job descriptions, work samples

Mistake 3: One Lump Sum Payment

❌ $12,000 check on December 31

✅ $1,000/month for 12 months with timesheets

Mistake 4: Work They Clearly Can’t Do

❌ 8-year-old “consultant” earning $20K

✅ 8-year-old filing assistant earning $3K

Mistake 5: No Actual Work Performed

❌ Just giving your kid money and calling it wages

✅ Documented tasks with real business value

Setting It Up: Step-by-Step

Week 1: Legal Setup

1.Determine what work your child will do

2.Write a formal job description

3.Determine reasonable hourly rate

4.Create timesheet template

5.Have “the talk” with your child about work expectations

Week 2: Financial Setup

1.Set up payroll system (or plan to do manual checks)

2.Open a checking account in your child’s name (with you as custodian)

3.Research Roth IRA options for minors

4.Decide on payment schedule

Week 3: Start Working

1.Child begins performing work

2.Track every hour with detailed timesheets

3.Keep work samples/photos

4.First paycheck issued

Ongoing:

•Regular paychecks (weekly, bi-weekly, or monthly)

•Maintain detailed records

•Save work samples

•At year-end: Issue W-2 or 1099

•File taxes (even if they owe $0)

Tax Filing Requirements

Do they need to file taxes?

•If they earn less than $13,850: Not required, but recommended

•If they earn more than $13,850: Required

•If you want to contribute to Roth IRA: Must file to document earned income

What forms:

•Your business: Deduct wages as business expense

•Your child: Files Form 1040 (even if tax is $0)

•You provide them: W-2 or 1099-NEC

Real Family Example

The Morrison Family:

•Parents own a cleaning business

•Daughter Emma (age 14) works 6 hours/week

•Tasks: Scheduling, inventory, social media

•Pay: $15/hour = $90/week = $4,680/year

Results:

•Business deduction: $4,680 (saves parents $1,170 in taxes)

•Emma’s tax: $0

•Emma’s Roth IRA contribution: $4,680

•Projected value at age 65: $98,000+

The Morrisons kept $1,170 more this year AND set up their daughter for life.

Is This Worth It?

Do the math:

•Paying your child $10,000/year

•Your tax savings: $2,500-3,000

•Their tax: $0

•Total family savings: $2,500-3,000/year

•Over 10 years: $25,000-30,000 kept in your family

Plus:

•Your child learns work ethic

•They understand money management

•You build their financial foundation

•You teach real business skills

•You create generational wealth

Yes, it’s worth it.

Want to implement this strategy correctly? Our tax strategy webinar covers hiring your children, proper documentation, and advanced tax strategies for business owners.

[Register for Free Webinar →] LINK COMING SOON