Save Taxes by Hiring Your Children: What You Need to Know

If you are a small business owner or self-employed, hiring your children can be an effective way to reduce your taxable income while teaching valuable work skills. At Missouri Valley Payroll, we help business owners navigate these opportunities within IRS guidelines to maximize savings and avoid costly mistakes. Here is what you need to know about paying your children legally and tax-efficiently. By following these guidelines, you can lower your tax burden while giving your child valuable work experience and future financial advantages.

How Much Can You Pay Your Child Tax-Free?

For the 2025 tax year, the standard deduction for a single filer is $15,000. This means your child can earn up to $15,000 in wages from your business without owing federal income tax, as long as they have no other income. By paying wages up to this limit, your business deducts the wages as a business expense while your child pays no federal income tax on their earnings.

Employment Tax Advantages for Sole Proprietors and Partnerships

If your business is a sole proprietorship or a partnership where each partner is a parent of the child, the IRS provides special tax treatment:

·       You do not need to withhold or pay Social Security and Medicare taxes (FICA) on wages paid to your child under age 18

·       You do not need to pay federal unemployment tax (FUTA) on wages paid to your child until they reach age 21

However, these exemptions do not apply if your business is a corporation, an estate, or a partnership with partners who are not parents of the child. In those cases, standard payroll tax rules apply.

Requirements for Legitimate Employment

The IRS requires that your child be performing real, necessary work for your business. Their compensation must also be reasonable and similar to what you would pay a non-family employee for the same tasks. Paying your child an inflated wage for trivial work could trigger IRS penalties and disallowed deductions.

To comply, document their job duties, work hours, and payment records. Keep timesheets, copies of checks or direct deposits, and issue a W-2 at year-end. Treat your child like any other employee to maintain legitimacy.

Long-Term Benefits: Retirement Contributions

With earned income, your child becomes eligible to contribute to retirement accounts such as a Roth IRA. Contributions can grow tax-free over time, helping them build wealth early while benefiting from lower tax brackets.

Proposed Legislative Changes That May Impact Families

Several legislative proposals are under consideration that could enhance family tax credits. For example, these changes could increase the amount you can claim per child, potentially reducing your overall tax bill as a business owner who employs their children. Staying informed about these proposals allows you to plan ahead and adjust your payroll strategies to align with upcoming tax benefits. Proposals like the Family First Act and the Tax Relief for American Families and Workers Act seek to increase the Child Tax Credit and expand eligibility. While these proposals do not directly change the rules for hiring your children, they signal a broader focus on family tax relief that could complement payroll strategies.

Additionally, current provisions of the 2017 Tax Cuts and Jobs Act, including the $2,000 Child Tax Credit, are scheduled to expire in 2025 unless extended by Congress. Families should be aware of potential changes when planning tax strategies.

Key Takeaways for Business Owners

·       Hiring your children can offer meaningful tax savings and financial benefits if done within IRS guidelines

·       The opportunity is especially advantageous for sole proprietorships and certain partnerships

·       Proper documentation, reasonable pay, and legitimate work are critical to ensure compliance and protect deductions

At Missouri Valley Payroll, we help business owners stay compliant while making the most of every tax-saving opportunity. If you have questions about setting up payroll for your children or need assistance managing your payroll, contact us today.

Hiring your children can offer meaningful tax savings and financial benefits if done within IRS guidelines. The opportunity is especially advantageous for sole proprietorships and certain partnerships. Proper documentation, reasonable pay, and legitimate work are critical to ensure compliance and protect deductions.

At Missouri Valley Payroll, we help business owners stay compliant while making the most of every tax-saving opportunity. If you have questions about setting up payroll for your children or need assistance managing your payroll, contact us today.

Disclaimer: This article is for informational purposes only and does not constitute tax or legal advice. Consult with a qualified tax professional to determine how these strategies apply to your specific situation.