Tax benefits of hiring children in family business

For family business owners, tax planning is a year-round endeavor. You’re constantly looking for strategies to minimize your tax liability, retain more profits, and reinvest in your business. While there are many commonly used tax-saving tactics, one that is often overlooked—but can provide significant savings—is hiring your children to work in your business. Not only can this strategy reduce your overall tax burden, but it also provides a unique opportunity to teach your kids essential skills related to earning, saving, and investing money, setting them up for future financial success.

Why consider hiring your kids?

Employing your children can lead to substantial tax advantages. For one, the wages you pay them may be deductible as a business expense, reducing your taxable income. If your child is under 18, you may also be able to avoid certain payroll taxes altogether, depending on the business structure. Plus, since your children are likely in a lower tax bracket, their earnings will be taxed at a much lower rate than yours. The result? More of your hard-earned money stays within the family.

The savings potential

If you have more than one child, the savings can multiply quickly. Some family businesses save tens of thousands of dollars annually simply by incorporating this strategy. Additionally, wages paid to your children can be used to fund educational expenses, extracurricular activities, or even contribute to a Roth IRA, setting them up for long-term financial growth.

Qualification rules and best practices

Of course, to fully benefit from this strategy, it’s important to understand the qualification rules and follow best practices to ensure compliance with IRS regulations. This includes having clear job descriptions, maintaining proper records, and paying a reasonable wage for the work your children perform. The IRS expects the arrangement to be legitimate, meaning your child must actually do meaningful work for the business—not just be listed on the payroll.

In this Guide, we’ll cover:

• Key tax benefits of hiring your children
• Qualification rules and IRS guidelines
• Best practices to avoid common mistakes
• How to calculate your potential savings

By taking advantage of this powerful tax strategy, you can lower your business’s tax burden while fostering your children’s financial literacy and work ethic. Whether your business is a retail store, consulting firm, or local service provider, this guide will help you navigate the process and ensure you’re maximizing the available benefits.

Major tax advantages of hiring your kids

1. Income shifting to minimize taxes

The primary tax benefit comes from shifting income from your high tax bracket to your child's low or zero tax bracket. For 2024, your child can earn up to the $14,600 ($15,000 for 2025) standard deduction in wages from your business without owing any federal income taxes. By paying them up to this amount, you transfer a portion of business income to your child tax-free.

2. Payroll tax exemptions on their wages

If your business is a sole proprietorship, LLC taxed as a sole prop, or husband-wife partnership, your child's wages are exempt from Social Security, Medicare, and federal unemployment (FUTA) taxes until they reach age 18 (or age 21 for FUTA). This payroll tax exemption saves you the 7.65% employer portion of FICA taxes on their wages.

3. Deduct their wages as business expenses

The wages you pay your child for legitimate work are tax-deductible business expenses. This lowers your business income and self-employment taxes. Just be sure their pay is reasonable for their age and job duties.

4. Earned income benefits for your child

Earning income as a minor provides additional perks for your child beyond the wages, such as the ability to contribute to a Roth IRA. Contributing their earnings to a Roth IRA allows the money to compound tax-free for decades until retirement, giving them an early start on building wealth.

Key requirements to claim the tax benefits

To qualify for these tax breaks, you must meet certain criteria:

• Hire only your child under age 18 (or under 21 for FUTA tax exemption). A child is considered as  your biological child, adopted child, stepchild, or foster child.
• Assign them bona fide work that's ordinary and necessary for your business. Create a job description, schedule, and pay rate as you would for any employee.
• Pay reasonable wages for the child's age and work performed, at least minimum wage. Don't inflate their pay just for tax purposes.
• Comply with applicable federal and state child labor laws, such as work hour limits and prohibited occupations for minors.
• Treat them as a formal employee. Have them complete I-9, W-4 and state withholding forms, and issue a W-2 at year-end.
• Keep records to substantiate their work and wages like timesheets and pay stubs in case of an IRS audit.

Strategies to maximize the tax savings

To get the most tax savings from employing your kids, consider these tips:

• Pay your child up to $14,600 in 2024 ($15,000 for 2025) to avoid any income tax on their earnings. If that's more than your business can afford, pay what you can under that amount.
• Take advantage of the Social Security and Medicare tax exemptions by paying your under-18 child out of your sole proprietorship, single-member LLC, or spousal partnership.
• Deposit some or all of your child's earnings into a Roth IRA. For 2024, you can contribute up to the $7,000 annual limit or their total earnings, whichever is less.
• Have your child assist with household chores and yard work through the business to maximize their work hours. Just keep pay reasonable.
• Maintain detailed records, including timesheets, job descriptions, pay stubs, and tax forms in case the IRS ever questions their employment.

Example: The Johnson family saves 0ver $7,000 per year

To show how these tax benefits add up, let's look at the Johnson family. They own a retail store operated as a sole proprietorship and employ their son and daughter in the business.

The kids, ages 16 and 17, each work about 10 hours a week doing inventory, stocking shelves, and cleaning. Their parents pay them $15 per hour and manage their schedules so each earns the maximum $14,600 standard deduction for a total of $29,200 in wages.

By paying their kids the standard deduction amount, the Johnsons shift $29,200 of business income to their children tax-free. Since both kids are under 18, the parents save about $2,233 (7.65% of $29,200) in payroll taxes. And by deducting the $29,200 in wages, the parents also save about $4,380 in income and self-employment taxes at their 15% marginal tax rate. Finally, the kids contribute most of their earnings to their Roth IRAs, which will grow to over $1 million each by retirement.

In total, the Johnsons cut their taxes by over $7,000 every year by employing their son and daughter. Over the 5 years of hiring their kids until they leave for college, those tax savings really make a difference.

Put the Hiring kids tax strategy to work for your family business

As you can see, employing your children in the family business can be an incredibly tax-efficient strategy that allows you to retain much more of your business income. Beyond the immediate tax savings, this approach also offers long-term benefits—helping your children build valuable skills, teaching them responsibility, and even laying the groundwork for their future financial security.

Yet, despite these advantages, many business owners miss out on this opportunity. Why? Often, it’s simply because they’re unaware of the tax rules or assume the process is too complicated to be worth the effort. In reality, the requirements are more straightforward than you might expect, and with a little planning, your business can begin reaping the rewards right away.

The key is to understand the IRS guidelines and how to structure the arrangement properly—ensuring the work performed is legitimate and that your children are paid a reasonable wage for their contributions. Once you have the right framework in place, the potential savings and benefits can be significant.

That's why the tax experts at Instead built the Hiring Kids Tax Strategy to make it easy for business owners like you to unlock the tax savings of putting your kids to work in the family business. This strategy walks you through how to compliantly hire your children, determine their pay, and maximize your write-offs.

It's one of many lucrative tax strategies included in Instead's innovative tax reduction platform made exclusively for businesses and the self-employed. By finding all the credits and deductions that apply to your unique situation, Instead helps you minimize your taxes owed and grow your wealth faster.

With the Hiring Kids and other tax strategies, Instead gives you the calculations, forms and guidance to claim every tax break you're entitled to, even ones most tax pros don't know. It integrates directly with your books to tally your savings so you can see how much each strategy puts back in your pocket.

Want to see how much your business can save?  Get started for free and discover tax savings you never knew existed with the Hiring Kids and 20+ other strategies tailored to your business. On average, Instead saves users $18,500 a year - how much will you save?