If you’re a business owner with children, you’re sitting on a hidden gem: the ability to legally pay your children for their work. This strategy not only reduces your taxable income but also instills a sense of responsibility and money management in your kids.
Whether you’re curious about tax benefits, payroll rules, or the type of work your kids can do, this guide has you covered.
Let’s start with the easiest question!
Can I Pay My Children as Employees of My Business
Yes, you can! The IRS allows you to employ your children as long as the work they perform is legitimate and their wages are reasonable for the tasks. For example, they could help with filing, social media management, cleaning, or even property upkeep.
If your business is a sole proprietorship or a family-owned LLC, you won’t need to withhold payroll taxes for kids under 18. This is a huge bonus for businesses looking to minimize expenses. Plus, their income remains tax-free up to $13,850 in 2024, thanks to the standard deduction.
What Are the Tax Benefits of Paying Your Kids From Your Business?
Hiring your children comes with a host of tax benefits:
- Deductible Wages: Payments to your children count as a business expense, reducing your taxable income.
- Tax-Free Income: Your kids can earn up to $13,850 tax-free in 2024, and likely more in 2025 as adjustments are made for inflation.
- Payroll Tax Savings: If your children are under 18, you don’t need to pay Social Security, Medicare, or Federal Unemployment (FUTA) taxes for their wages (if you operate as a sole proprietorship or parent-owned partnership).
- Savings Opportunities: The income your kids earn can be used to fund their Roth IRAs, giving them a head start on long-term wealth building.
This approach isn’t just a financial win—it also provides a hands-on education in earning and managing money.
How Much Can I Pay My Kids Without Paying Payroll Taxes?
For kids under 18, the IRS rules make it simple. Sole proprietorships or family-owned partnerships don’t have to withhold payroll taxes, allowing you to pay your kids up to $13,850 tax-free in 2024.
If your child is 18 or older, payroll taxes will apply. In this case, you can choose between paying them as an employee with a W-2 or as a contractor with a 1099-NEC. Just ensure their classification aligns with IRS guidelines to avoid potential penalties.
What Kind of Work Can I Have My Kids Do for the Business?
The possibilities are endless, as long as the tasks are legitimate and benefit your business. Here are a few examples:
- Office Tasks: Filing paperwork, managing schedules, or organizing supplies.
- Marketing Support: Handling social media posts, creating graphics, or assisting with email campaigns.
- Property Management: Cleaning rental properties or helping with maintenance.
- Inventory Assistance: Counting, organizing, or restocking items.
Make sure their responsibilities match their skill level, and always document their work. Tasks like family chores won’t qualify as business-related and could raise IRS concerns.
Are There Any Age Restrictions for Paying Kids From My Business?
No minimum age exists for hiring children, as long as the work is appropriate for their age and maturity. That said, child labor laws still apply, so it’s important to ensure compliance with both federal and state regulations. Tasks should be safe, reasonable, and provide value to your business.
Steps to Implement This Strategy
- Assign Legitimate Tasks: Make sure the work your children perform directly benefits your business.
- Pay Reasonable Wages: Their pay should reflect what you’d offer an unrelated employee for similar work.
- Document Everything: Keep timesheets, job descriptions, and payment records to defend your deductions if the IRS ever audits your business.
- Use the Right Business Structure: If you operate as an S-Corp or C-Corp, consider paying your kids through a sole proprietorship or family-owned LLC to avoid payroll taxes.
If you’re supporting grandchildren who can assist with your business, there’s a similar strategy with an extra step to make it effective. Learn more in my article: “Paying Your Grandchildren for the Business”.
Why This Strategy is a Win-Win
By hiring children in family business operations, you reduce your taxable income, teach your kids about responsibility, and set them up for a successful financial future. Whether it’s contributing to their retirement accounts, saving for education, or simply instilling work ethics, this approach benefits everyone involved.
This a huge topic for all business owners. For a deeper dive, check out Chapter 12 of my book, “The Tax and Legal Playbook – Game Changing Solutions for the Business Owner”.
Ready to take advantage of this strategy? Get your FREE TAX GUIDE now and start building a smarter tax plan today!
My LLC is wholly own by a c corp which is wholly owned by me, can I then place my inder age children on payroll?