Business Owners: Stop Overpaying Taxes by Hiring Your Kids
Hiring your kids to work in your business isn’t just about giving them a summer job—it’s a strategic financial move that could benefit both your family and your bottom line.
This approach provides valuable tax benefits, teaches lifelong lessons in responsibility and money management and could help establish your children’s financial stability. However, like any tax strategy, it’s important to execute it correctly.
Let’s dive into how you can make this work for your family.
- Follow the Rules (The IRS Is Watching)
Hiring your kids comes with clear IRS guidelines. Ignoring them could cost you more than you save.
- Reasonable Work, Reasonable Pay:
- The work must genuinely benefit your business, and their wages need to match the job. For example, paying your 12-year-old a full-time salary for organizing a few files won’t fly.
- Tax Structure Matters:
- Sole Proprietorships or Partnerships (with both parents as partners): Wages paid to children under 18 are exempt from Social Security and Medicare taxes.
- Corporations:
- You’ll need to pay Social Security, Medicare, and FUTA taxes.
- Payroll is Non-Negotiable:
- Your child must be on payroll, complete a W-4, and receive a W-2 at year-end.
- Supercharge Their Paychecks with a Roth IRA
Once your child earns income, you have an incredible opportunity: opening a Roth IRA for them.
- No Age Minimum: As long as your child earns income, they can contribute to a Roth IRA.
- Custodial Accounts: You’ll manage the account until they’re legally an adult.
- Tax-Free Growth: Contributions grow tax-free, and qualified withdrawals are tax-free, too.
Here’s some perspective: If your child contributes $7,000 annually starting at age 10, with an average annual return of 7%, they could have over $4 million by age 65. That’s life changing.
- Know What Counts as Earned Income
Your child’s earnings need to be legitimate:
- Tasks in your business (e.g., filing, social media updates, customer assistance)
- Babysitting or yard work (if documented and paid formally)
But here’s a heads-up: allowance for household chores doesn’t count as earned income for tax or Roth IRA purposes.
- Build Financial Literacy Early
Beyond the financial perks, hiring your kids creates teachable moments. They’ll learn about:
- Earning and budgeting money
- Saving for long-term goals
- The power of compound growth in investments
I’ve seen clients share stories of their teenagers proudly tracking their Roth IRA balances or using their earnings to buy their first car. These are lessons that stick. I have a great video here on strategies for teaching your kids financial literacy and another video here on how to prep your teen for financial adulthood. Be sure to check them out!
The Bottom Line:
Hiring your kids isn’t just a tax strategy—it’s a way to invest in their future while optimizing your business finances. It’s a strategy that could benefit both and that can help create meaningful, long-lasting benefits for your family.
If you’re ready to explore how this could work for your family, let’s chat. Together, we’ll build a plan that helps establish the financial well-being for your kids and your business.
Ready to maximize tax savings and set your kids on a path to financial independence? Let’s talk!
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the author and not necessarily those of Raymond James. Raymond James and its advisors do not offer tax advice. You should discuss any tax matters with the appropriate professional. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted.
