Hiring your kids: a legal, tax-smart way to pay your children from your business

As a business owner, you're probably looking every year for legal ways to lower your tax bill. Here's a strategy few owners use, and done right it's completely legal: putting your kids on the payroll.

How it works

The key is paying your children for real, documented work in your business. Done correctly, it lets you:

• Deduct their wages as a business expense.
• Keep your child from owing income tax on that money (if it stays within the standard deduction).
• Teach them about money and responsibility early.

It's a 100% legal strategy, as long as you do it the right way.

A real example

Daniel is one of my team members. He's also my son. He's 12, and for a while now he's become a real asset to the business.

He loves editing videos in CapCut, and since my companies produce a lot of content for social media, we spotted an obvious opportunity: why not pay him for that work? After reviewing the IRS rules and documenting his role, we hired him properly and on the record.

The result has been positive on several levels. Daniel gets fair pay for real work and has learned the value of money young. For the business, it's a double win: we lower our tax bill by deducting his wages, and we strengthen the family's financial future with a fully legal strategy. If you have kids who can genuinely help with day-to-day tasks, this might be an opportunity for you too.

How to apply it in your business

1. Make sure the work is real and documented

The IRS lets children work in their parents' business, but the job has to be legitimate and justified. You can't pay your child just to cut your taxes. Examples of real tasks:

• Running social media or editing videos (like Daniel).
• Organizing documents and files.
• Basic administrative support.
• Following up with clients (if they're old enough).

Keep detailed records of their duties and pay. That's what protects you in an audit.

2. Use the right tax structure

How much you save depends on how your business is set up.

• If you operate as a sole proprietorship or a partnership owned only by the parents: wages you pay your own child under 18 are exempt from Social Security and Medicare (FICA) and from federal unemployment tax. That's the immediate saving, and you still deduct the wages as a business expense. (The Social Security and Medicare exemption applies while the child is under 18; the federal unemployment exemption runs until 21. Income tax withholding still applies.)
• If you operate as an S-Corp or C-Corp: that exemption doesn't apply, because the employer is the corporation, not you personally. The common workaround is a Family Management Company (FMC): a separate sole proprietorship you own that handles certain management tasks, bills your corporation a management fee, and employs your kids (so their wages keep the FICA exemption). This works, but it's not a plug-and-play loophole: it needs a real service arrangement, an arm's-length management fee, separate books, genuine supervision, and documented duties, hours, and reasonable pay. Without that substance, the IRS can disregard it, so set it up with a professional.

3. Pay up to the standard deduction

The federal standard deduction was $15,000 for 2025 and adjusts each year. If you pay your child up to that year's amount, they generally owe no federal income tax on it (a dependent's standard deduction covers earned income up to that cap), and you still deduct it as a business expense.

A simple example: say you pay your child $12,000 a year for managing social media and digitizing documents.

• Your child: owes no income tax, because the income is within the standard deduction.
• Your business: deducts the $12,000 as an expense, lowering its taxable income.

And because this is earned income (wages for real work), it isn't subject to the "kiddie tax" that applies to a child's investment income.

What if the IRS audits you?

The IRS allows this because it's a legal practice, but you have to do it right:

• Keep a job description and their hours.
• Save pay stubs or bank records.
• Make sure the pay is reasonable for the tasks (you'd pay a stranger a similar rate for the same work).

In Daniel's case, we document every step so it all lines up with the IRS rules. Follow these and you won't have legal or tax problems.

The move that makes it even smarter

Here's where it compounds. Once your child has earned income, they can open a Custodial Roth IRA, where money grows and comes out tax-free for life (the contribution is capped at the lesser of their earned income or the annual IRA limit, $7,500 for 2026). Pair that with a Trump Account (which doesn't require earned income), and you have two accounts growing at once, one tax-deferred and one fully tax-free, funded by work your child actually did. It's one of the smartest long-term moves a business owner with kids can make.

Frequently asked questions

Is hiring your own kids legal?

Yes, as long as the work is real, the pay is reasonable, and you document it. The IRS allows parents to employ their children in the business; what it disallows is paying them for work they don't actually do.

How much can I pay my child tax-free?

Generally up to the standard deduction for the year, since earned income within that amount isn't subject to federal income tax (the standard deduction was $15,000 for 2025 and adjusts yearly).

Do I have to withhold payroll taxes on my child's wages?

If your business is a sole proprietorship or a partnership owned only by the parents, wages to your under-18 child are exempt from Social Security, Medicare, and federal unemployment tax. If you're an S-Corp or C-Corp, that exemption doesn't apply unless you use a structure like a Family Management Company.

What kind of work can my child do?

Real, age-appropriate tasks: social media, video editing, filing and organizing, basic admin, simple customer follow-up. The work has to be something the business genuinely needs.

What records do I need to keep?

A written job description, their hours, proof of payment (pay records or bank transfers), and pay that's reasonable for the work. That documentation is your protection in an audit.

The bottom line

There are several legal ways to lower your tax bill, but they only work when you set them up with real substance and clean records. Hiring your kids for legitimate work is one of the few moves that pays off on two fronts at once: it lowers your taxes today and it builds your family's financial future. Just do it the right way, with real work, reasonable pay, and documentation, ideally with a professional who knows the rules.