Hiring Your Kids: The Tax Strategy High-Earning Families Are Using

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Solid business tax planning covers more ground than most business owners expect. Deductions, entity structure, retirement contributions, and timing strategies all matter, but one of the most overlooked tools sits right inside the household. Hiring family members, specifically your own children, is a fully legal and IRS-recognized strategy that can shift income out of your highest tax bracket, reduce payroll taxes, and begin funding your child's financial future with dollars that would have been taxed anyway. For families who are also thinking about business succession planning, getting children involved early creates something beyond a tax benefit: it builds familiarity with the business, establishes a track record of contribution, and lays the groundwork for a transition that actually works when the time comes.

If you or your spouse owns a business and you have children, the IRS allows you to put them on payroll as legitimate employees. Done correctly, this strategy reduces your taxable business income, can eliminate certain payroll taxes entirely, and starts building your child's financial future at the same time. It is one of the few places in the tax code where the business, the parent, and the child all come out ahead simultaneously.

You do not need to jointly own a business for this to work. If one spouse runs a consulting practice, a real estate investment business, a medical or law practice, or any other self-employment activity, that person can hire the couple's children as employees. The other spouse's income, employment status, or involvement in the business is irrelevant to the strategy.

Why Shifting Income to Your Kids Works

Because the tax code explicitly allows income to move from a higher bracket to a lower one, and business owners can capture that difference as real savings.

Your business income is taxed at your marginal rate, which for high-earning households commonly sits at 32%, 35%, or 37%. When you pay your child a wage for work they genuinely perform, that wage is a deductible business expense, no different from paying any other employee. Your child then reports that income on their own return, where it is taxed at their rate, which for most children is dramatically lower than yours.

For 2025, a child who is not claimed as a dependent can earn up to roughly $15,750 before owing any federal income tax. A child who is still a dependent has a more limited standard deduction equal to the greater of $1,350 or their earned income plus $450, capped at the standard deduction limit. Either way, a family in the 32% bracket paying a child $12,000 in wages produces approximately $3,840 in federal income tax savings at the business level, while the child owes little or nothing on the same dollars.

The Payroll Tax Advantage: Why Your Business Structure Matters

Because the most powerful part of this strategy, the FICA exemption, only applies to specific entity types, and knowing where you stand is essential.

When the employing business is a sole proprietorship, a single-member LLC taxed as a sole proprietorship, or a partnership owned entirely by both parents of the child, wages paid to a child under age 18 are exempt from Social Security and Medicare taxes (FICA). That exemption eliminates the 7.65% employer share of FICA you would owe on any other employee's wages. Wages paid to a child under age 21 in these same structures are also exempt from federal unemployment taxes (FUTA).

This is the most valuable piece of the strategy for sole proprietors and single-owner LLCs. A business owner paying their 16-year-old $15,000 saves not only the income tax at their bracket but also avoids FICA entirely on those wages, a combined benefit that can exceed $5,000 in a single year.

If the business is an S corporation or C corporation, the FICA exemption does not apply. The corporation is treated as the legal employer rather than the parent personally, so wages paid to a child run through the same payroll tax process as any other employee. The income-shifting benefit and the wage deduction still apply, but the payroll tax savings disappear. Some S corp owners create a separate sole proprietorship or family management company to handle work their children perform, preserving the exemption on those wages, though this approach requires proper legal and tax structuring before implementation.

High-earning couples where only one spouse owns the business should note that it is the structure of the employing business, not the household's total income or tax picture, that controls these rules. A high-income dual-earner household where one spouse owns a solo LLC can still capture the full FICA exemption on their child's wages from that LLC.

How the Child's Income Is Taxed

Because knowing what your child actually owes, and does not owe, determines how much of this strategy's value you can capture.

Wages your child earns from your business are classified as earned income, reported on a W-2, and taxed at the child's own rate. The kiddie tax rules, which push a child's unearned income such as dividends or capital gains onto the parent's return at the parent's rate, do not apply to wages. Earned income from actual work is always taxed at the child's rate, full stop.

For a dependent child in 2025, the standard deduction offsets earned income dollar for dollar up to its ceiling. A child earning $10,000 who has a $10,000 standard deduction owes zero in federal income tax. If earnings exceed the standard deduction, only the excess is taxable, starting at 10% for the first $11,925 of taxable income. Even in that scenario, the effective tax rate on the child's wages is a fraction of what those same dollars would cost the parent.

The Roth IRA Opportunity

Because earned income is the key that unlocks one of the most powerful long-term wealth-building tools available, and your child can start using it earlier than almost anyone realizes.

The moment your child has earned income, they qualify to contribute to a Roth IRA. There is no minimum age. The 2025 contribution limit is $7,000 per year, or the total of the child's earned income for the year, whichever is less. Because contributions go in with after-tax dollars and the child likely owes little or no tax on those wages, the money enters the account nearly untouched by the IRS.

Growth inside the Roth IRA is tax-free, and qualified withdrawals in retirement are also tax-free. A parent can fund the Roth IRA on the child's behalf as long as the contribution does not exceed the child's actual earned income for the year. The wages your business was going to pay someone anyway can become the seed capital for a retirement account that has 50 or more years to compound.

What Qualifies as Legitimate Work

Because the IRS looks more closely at family employment than at almost any other business expense, and a poorly documented arrangement is worse than no arrangement at all.

The work your child performs must be genuine, age-appropriate, and directly useful to the business. It must be work you would reasonably pay an outside contractor or employee to perform. Paying a nine-year-old for household chores, even framed as business assistance, does not qualify. Common examples of legitimate tasks include filing and organizing documents, data entry, managing social media accounts, assisting with photography or video content for marketing purposes, inventory management, errand running, and customer-facing phone or email support.

Compensation must also be reasonable for the work performed. Paying a 12-year-old $50,000 to sort mail invites scrutiny. The wage should reflect what you would pay any other employee doing comparable work at the same skill level.

Documentation That Protects the Deduction

Because the paper trail is the entire defense if the IRS asks questions, and high-income taxpayers are more likely than most to face that question.

Treat your child like any other employee from a paperwork standpoint. Complete a Form W-4 and a Form I-9 when they start. Keep a time log recording dates, hours, and specific tasks completed. Write a brief job description and set a wage rate that reflects the market for similar work. Issue a W-2 at the end of each year showing their total wages.

Open a bank account in your child's name and deposit their pay directly into it. This creates a clear, auditable paper trail showing that money actually changed hands rather than existing only as a journal entry. Document the work itself when practical, whether that means saving the photos they took, the spreadsheets they maintained, or the social media posts they created. High-earning households that use this strategy should keep the documentation organized and accessible, because the benefit is legitimate and the records are what make it defensible.

Age and Labor Law Basics

Because federal and state labor law still applies to family businesses, and the exemptions are narrower than many assume.

Under the Fair Labor Standards Act, children employed in a business owned entirely by their parent can generally work at any age and any number of hours, provided the work is not hazardous. Hazardous occupations are off-limits for anyone under 18, regardless of the family relationship. State rules vary considerably. Texas generally follows the federal exemption for parent-owned businesses without requiring work permits for minors in that context. California requires work permits for all minors under 18, including children working for a parent, with strict limitations by age. Check your state's specific requirements before putting a young child on payroll.

A Practical Example

Consider a physician who owns a solo medical practice structured as a sole proprietorship. Her husband is a salaried corporate attorney. Neither works together in a business, but her practice is hers alone. Their 15-year-old manages the practice's patient intake spreadsheets, organizes physical files, and runs occasional supply errands. She pays the child $12,000 for the year at a rate consistent with what a part-time administrative assistant would earn.

The practice deducts $12,000 as a wage expense, directly reducing the physician's self-employment income. No FICA taxes apply because the child is under 18 and the employer is the parent's sole proprietorship. The child files a tax return reporting $12,000 in wages. After their standard deduction, federal income tax is zero. The parents then contribute $7,000 of the child's wages into a custodial Roth IRA. At a 35% marginal rate, the family's tax savings from the wage deduction alone is approximately $4,200, not counting the eliminated self-employment tax on those dollars and the decades of tax-free compounding now accumulating in the Roth IRA.

What to Watch For

This strategy is legal, well-established, and fully supported by the tax code when executed correctly. The risk is not the strategy itself but the execution. Wages for work not actually performed, compensation that is unreasonably high, missing W-2s, or no documentation of the employment relationship are all grounds for a disallowed deduction and potential penalties. A tax professional who works with small business owners can help structure the arrangement properly from the start and keep the records in order over time.

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