Hiring Your Kids: Tax Savings, Family Bonds, and Long-Term Benefits
If you’re a business owner balancing the demands of work and family, hiring your kids to work in your business can be a game-changer. Not only does it provide valuable real-world experience for your children, but it also comes with significant tax benefits when done correctly.
However, there’s a right way to do this to maximize the financial perks while staying compliant with IRS rules. Payroll is one area where mistakes are costly—we always recommend using a payroll service like Gusto to avoid penalties and ensure everything runs smoothly.
Here’s how hiring your kids can benefit your business, your family, and their financial future.
The Tax Benefits of Hiring Your Kids
Hiring your kids shifts income from your higher tax bracket to theirs, allowing you to reduce your overall family tax burden. If their income stays below the standard deduction, they won’t owe any federal income taxes.
2025 Standard Deduction Examples
- Federal: The federal standard deduction for 2025 is $15,000 for single filers, meaning your child can earn up to this amount tax-free.
- State Example – California: California’s standard deduction for single filers is $5,540 in 2025, significantly lower than the federal threshold. If you’re in California, it’s essential to consider this difference when planning your child’s wages.
By keeping their income under these thresholds, you can effectively shift income tax-free while teaching your kids about earning and managing money.
Payroll Tax Exemptions for Kids Under 18
If your business is a sole proprietorship or a partnership where both parents are the only partners, wages paid to children under 18 are exempt from payroll taxes like Social Security and Medicare. This is a significant savings for both your business and your child.
For children 18 and older, payroll taxes will apply, but the benefits of tax-shifting and other strategies—like funding a Roth IRA—still may make this worthwhile.
If your business is a S Corporation or C Corporation, kids under 18 are not exempt from payroll taxes. Reach out and ask how we can help you implement this same strategy via a Family Management Company.
Why Payroll Isn’t a DIY Job
Payroll is one of the most common areas where businesses incur fines and penalties, often due to missed deadlines or misfiled forms. Managing payroll on your own is risky, especially when hiring family members.
That’s why we set up our clients with payroll services like Gusto, which automates payroll taxes, ensures timely filings, and generates W-2s at year-end.
Other popular payroll services include ADP, Paychex, and QuickBooks Online Payroll. We also have a payroll company that we refer clients to that like to have a designated rep where everything is done for you.
Why use a 3rd party payroll provider?
- They calculate and withholds the correct taxes
- They withdraw those taxes from your account and pay them on your behalf, on time
- They handle state and federal payroll filings automatically
- They issue W-2s for employees at the end of the year
Using a payroll service keeps you compliant, reduces stress, and protects you from costly penalties. For any business owner with payroll, this a cost of doing business and not something we recommend trying to go at it alone.
Creating Family Bonds and Teaching Responsibility
Hiring your kids isn’t just about tax benefits—it’s also an opportunity to teach them responsibility and include them in the business.
- Teach Real-Life Skills: Assign meaningful tasks like filing, managing social media, or running errands to help them build a strong work ethic.
- Inclusion: Bringing your kids into the business allows them to see what takes you away from family time and creates a shared sense of purpose.
Best Practices for Hiring Your Kids
Follow these guidelines to maximize the benefits and stay compliant with tax laws:
1. Assign Age-Appropriate Work
Tasks should match your child’s abilities and contribute genuine value to your business.
- Examples:
- Ages 7-10: Filing, organizing supplies, or cleaning the office.
- Ages 12-15: Helping with customer service or managing social media.
- Ages 16+: Bookkeeping, marketing, or running errands.
2. Pay a Market Rate
Compensate your kids based on what you’d pay a non-family employee for the same work. Paying inflated wages for simple tasks (like $10,000 to “model on social media posts”) could raise IRS red flags.
3. Use a Payroll Service
Payroll errors are expensive. Use a service that keeps you on time, calculates taxes, withholds tax amounts, and ensures timely filings.
4. Document Everything
Maintain detailed records, including:
- Job descriptions for each child.
- Timesheets and hours worked.
- Photos of your kids performing their tasks, recommended
- Receipts or other evidence of completed work.
Supercharge Their Earnings with a Roth IRA
One of the best perks of paying your kids is that their earned income qualifies them to contribute to a Roth IRA, which offers incredible long-term financial benefits.
How It Works
- In 2024 and 2025, kids can contribute up to $7,000 (or their total earned income, whichever is lower) to a Roth IRA.
- Contributions can be withdrawn tax-free in the future, without retirement age limitations, for major expenses, like college tuition or a first home purchase.
- Earnings grow tax-free, making it a powerful wealth-building tool.
Example:
A child who starts contributing to a Roth IRA at age 12 could have a substantial nest egg by their 30s, giving them the financial freedom to buy property, start a business, or fund retirement.
Avoiding IRS Scrutiny: Stay Within the Rules
The IRS is wary of businesses abusing this strategy, so it’s important to stay within their guidelines:
- Don’t Assign Unrealistic Tasks: A toddler isn’t managing your client outreach.
- Pay Fairly: Only pay market rates for work performed.
- Ensure Value: The work must provide real value to your business.
When done correctly, hiring your kids can offer incredible benefits while keeping you fully compliant.
Start Early, Stay Compliant, and Save Big
Hiring your kids is more than a tax strategy—it’s a chance to bond as a family, teach them life skills, and secure their financial future. The key to making this work is staying organized, using a payroll service, and documenting everything thoroughly.
If you’re ready to explore this strategy, download my free ebook, "Hiring Your Kids: A Tax-Saving Strategy," for more detailed information.
Download the free guide now and let’s make this strategy work for your business and your family!
Need help getting started? Schedule a consultation with me today, and we’ll create a customized plan to help you hire your kids, save on taxes, and set them up for financial success.
