Hire Your Kids for Tax Savings

For family-owned businesses, one of the most overlooked strategies for reducing taxes and keeping more money in the household is hiring your children. Done correctly, this approach provides significant tax savings, teaches your kids valuable skills, and can even build their work ethic and financial responsibility from an early age. However, the IRS pays close attention to these arrangements, and there are strict requirements you must follow to make sure your plan holds up under audit.

When a business legitimately employs a child, the wages paid are deductible business expenses. That reduces the taxable income of the business, lowering the overall tax bill. At the same time, the income shifts to the child, who is typically in a lower tax bracket.

Depending on the structure of your business and your child’s age, you may also be able to take advantage of payroll tax savings. For example, in a sole proprietorship or a partnership where both partners are the child’s parents, wages paid to a child under 18 are exempt from Social Security and Medicare taxes, and wages to a child under 21 are not subject to federal unemployment tax. This means you can move income from your return to your child’s return while avoiding payroll taxes altogether, as long as the rules are met.

Your child can earn up to the standard deduction amount each year without owing federal income tax. For 2025, that figure is $15,000. That means your business gets a deduction while your child can receive income that is tax-free to them. The child can use those wages to fund future goals like college savings, Roth IRA contributions, or simply learning how to budget and manage money. It is one of the rare opportunities in tax planning where the same dollar produces double benefits.

The benefits are compelling, but the IRS has been clear that these arrangements are often abused. To withstand scrutiny, you must treat your child as a legitimate employee. That begins with the work itself. The child must perform actual, necessary services for your business, and the tasks must be age-appropriate. It is not enough to list them on payroll; there must be real, documented work. Think of duties like filing, cleaning, helping with social media, answering phones, or even more advanced work depending on their skills.

Compensation must also be reasonable for the tasks performed. You cannot pay your child a full-time salary for a handful of simple chores. The pay should be in line with what you would pay another employee for the same work in your area. Payroll records must be accurate and maintained in the same way they would be for any employee. Time sheets, job descriptions, and payroll tax filings are all essential pieces of documentation. Payments should be made by check or direct deposit into the child’s account, never in cash.

Another critical requirement is to follow all employment laws. Even though the IRS allows these deductions, state labor laws regarding minors still apply. This may affect the number of hours your child can work and the type of work they are allowed to do. Ignoring these rules can cause more trouble than the tax savings are worth.

If you are audited, the IRS will look closely at whether the arrangement was a legitimate business expense or a disguised way of shifting income. Having organized payroll records, clear job descriptions, and proof of actual work performed are the keys to protecting yourself. Without them, the IRS can disallow the deduction, assess back taxes, and impose penalties.

Hiring your children can be one of the most effective tax strategies available to small business owners, but it is not something to take lightly. With careful planning, diligent recordkeeping, and adherence to both tax and labor laws, the benefits can be substantial. As always, consulting a qualified tax professional before implementing this strategy ensures you maximize the opportunity while staying fully compliant with IRS rules.