How to Legally Hire Your Child in Your Business and Cut Your Tax Bill

If you own a business and have children, you may be sitting on a deduction you have never used. Paying your own kids for real work in your business is fully legal, and the tax code rewards it.

The catch is that the IRS expects the arrangement to be real. The work has to be legitimate, the pay has to be reasonable, and the paperwork has to back it up.

Here is how hiring your child works, the tax savings it unlocks, and the rules that keep it audit-proof.

Why hiring your child pays off

Two things happen at once. Your child gains real-world experience and their own earned income, and your family lowers its overall tax bill.

The savings come from income shifting. Money that would have been taxed in your higher bracket moves to your child, who is almost always in a much lower one. At the same time, their wages become a deductible business expense for you.

And the numbers are friendlier than most owners expect. With the 2025 standard deduction set at $15,750 for a single filer, your child can earn up to that amount and owe zero federal income tax.

The payroll tax break most owners miss

This is where family employment really separates from hiring a stranger.

If your business is a sole proprietorship, or a partnership where the only partners are the parents, wages you pay your child under 18 are exempt from Social Security and Medicare tax. That is the FICA exemption under the tax code, and it applies to both sides of the wage.

Wages paid to a child under 21 are also exempt from federal unemployment tax (FUTA). So for qualifying family businesses, there is no payroll tax to pay on either end.

One important limit: this break does not apply if your business is an S-corporation or a C-corporation. There, payroll taxes apply in full. The income shifting and Roth IRA benefits below can still make it worthwhile, but the FICA savings go away.

Turn their paycheck into tax-free retirement money

Once your child has earned income, they can open and fund a Roth IRA.

For 2025, they can contribute up to $7,000, or their total earned income for the year, whichever is less. The money goes in with little or no tax, grows for decades, and comes out tax-free in retirement.

A teenager funding a Roth IRA today has one of the most powerful head starts the tax code allows. The same wage that lowers your tax bill becomes their long-term, tax-free savings.

The rules that keep it legitimate

Pay for real work at a reasonable rate

The job has to be genuine and age-appropriate: filing, data entry, social media help, cleaning, packing orders, or simple admin. The wage has to match what you would pay anyone else for the same work. Overpaying a young child is the fastest way to lose the deduction.

Run it through actual payroll

Treat your child like any other employee. That means an Employer Identification Number, a Form W-2 at year-end, and a clear paper trail. Even when no FICA applies, documenting the wages is what makes the earned income, and the Roth contribution, real.

Follow child labor laws

Federal law generally sets 14 as the minimum working age, but a parent’s sole proprietorship or partnership can employ their own child in non-hazardous work at a younger age. State child labor laws can be stricter, so check your state rules on hours and job types.

Keep clean records

Track employment dates, hours worked, wages paid, and any taxes withheld. These records are your protection if the IRS or a labor department ever asks how the arrangement worked.

When this strategy makes sense

The best fit is a sole proprietorship or a parents-only partnership with kids old enough to do real work. That combination unlocks the full benefit: the deduction, the payroll tax exemption, and the Roth IRA head start.

It is still useful for S-corps and C-corps through income shifting and the Roth IRA, just without the FICA break.

In our firm, we see family-employment savings left on the table every year by owners who assumed it was too complicated. It is not, when it is set up correctly. The mistakes that sink it are almost always the simple ones: no payroll, unreasonable pay, or no records.