How to hire your children and save thousands in taxes

Understanding the Hiring kids tax strategy

The Hiring kids tax strategy represents one of the most powerful yet underutilized tax savings opportunities available to business owners. By legally employing your children in your business, you can shift income from higher tax brackets to lower ones while taking advantage of significant payroll tax exemptions.

This strategy enables business owners to convert personal expenses into legitimate business deductions, while providing their children with valuable work experience and financial education. When implemented correctly, families can save thousands of dollars annually in taxes, laying the foundation for their children's financial future.

The key to success lies in understanding the specific rules and requirements that govern this strategy. The IRS has established clear guidelines for Hiring kids, and proper compliance ensures you can maximize tax benefits while avoiding potential audits or penalties.

Essential requirements for hiring your children

Before implementing the Hiring kids strategy, you must understand the strict requirements established by the IRS to ensure your arrangement qualifies for tax benefits.

Age and relationship requirements

Your children must be legitimate dependents, including biological children, stepchildren, adopted children, or foster children. The strategy is most beneficial for children between the ages of 8 and 21, with different tax advantages applying at various age ranges.

Children under 18 working for a parent's sole proprietorship or spousal partnership are exempt from Social Security and Medicare taxes. Children under 21 are exempt from the Federal Unemployment Tax Act (FUTA) taxes.

Business structure considerations

The tax benefits vary significantly based on your business structure:

Schedule C businesses and spousal partnerships: Provide the maximum tax advantages, with children under 18 exempt from Social Security and Medicare taxes, and children under 21 exempt from FUTA taxes.

S Corporations, C Corporations, and non-spousal Partnerships: Still allow for income shifting benefits, but all payroll taxes apply regardless of the child's age.

Family management companies: Can be established to maximize benefits for corporate entities through strategic structuring.

Legitimate work requirement

The work performed must be genuine and age-appropriate. The IRS requires that children perform actual services for the business, and the compensation must be reasonable for the work performed. This means you cannot pay your 10-year-old $50,000 for filing papers. Still, you can compensate them for tasks like data entry and filing, cleaning and organizing, social media management, photography for business purposes, administrative tasks, and inventory management.

Calculating your potential tax savings

The Hiring kids strategy can generate substantial tax savings through multiple mechanisms, depending on your business structure and the child's age.

Payroll tax savings for sole proprietorships

For sole proprietorships and spousal partnerships, the payroll tax savings can be significant:

• Children under 18: Exempt from Social Security (6.2%) and Medicare (1.45%) taxes, saving 7.65% on wages paid
• Children under 21: Exempt from FUTA taxes (6% on first $7,000 of wages)
• All eligible children: Allow income shifting from higher to lower tax brackets

For example, if you pay your 16-year-old child $12,000 annually, you'll save approximately $918 in payroll taxes (7.65% × $12,000) plus additional income tax savings from the deduction.

Income shifting benefits

The strategy becomes even more powerful when considering income shifting. By paying your child wages up to the standard deduction amount ($14,600 for 2024), you can:

1. Shift income from your higher tax bracket to your child's lower bracket
2. Create a legitimate business deduction for wages paid
3. Potentially eliminate income tax on the child's earnings if they don't exceed the standard deduction

This creates a double benefit: reducing your taxable income while keeping the money within the family. The business deduction directly reduces your business income, while the child may owe little to no income tax on their earnings.

Long-term wealth-building opportunities

Beyond immediate tax savings, the Hiring kids strategy creates opportunities for long-term wealth building. Children can contribute to Roth IRA accounts to build tax-free retirement savings from an early age, traditional IRA accounts to reduce further current-year tax liability, 529 education savings plans to fund future education expenses, and savings accounts to teach financial responsibility and money management.

Implementation steps and documentation requirements

Successfully implementing the Hiring kids strategy requires careful planning and meticulous documentation to ensure IRS compliance.

Establishing legitimate employment

Start by creating a formal employment structure:

1. Draft job descriptions that clearly outline the work your child will perform
2. Research market rates for similar positions to ensure reasonable compensation
3. Create written employment agreements signed by both parties
4. Establish regular work schedules and maintain time tracking records
5. Set up payroll systems to ensure proper withholding and reporting

Required documentation

Maintain comprehensive records to support your hiring strategy for children. Employment records should include signed employment agreements, detailed job descriptions, time-tracking logs that show hours worked, and documentation of the work performed. Payroll documentation requires W-4 forms for each child, I-9 employment eligibility verification, payroll registers showing wages paid, and quarterly and annual tax filings. Supporting evidence should include bank statements showing separate accounts for children, photos or videos of work being performed, testimonials from other employees or customers, and records of any training provided.

Payroll setup and compliance

Proper payroll setup is crucial for maintaining compliance:

1. Obtain the necessary tax identification numbers for your business
2. Set up payroll systems through providers like Gusto or ADP
3. Establish separate bank accounts for each child to demonstrate financial independence
4. File required tax forms including W-2s, 941s, and state-specific forms
5. Maintain accurate records of all payroll transactions and tax filings

Common mistakes to avoid

Several common mistakes can jeopardize your hiring strategy for children and trigger IRS scrutiny. Unreasonable compensation is one of the most frequent mistakes, where business owners pay children amounts that are unreasonable for the work performed. The IRS requires that wages be commensurate with the services provided. Inadequate documentation is another common pitfall, as the IRS expects the same level of documentation for family employees as for unrelated workers. Mixing business and personal expenses should be avoided, as it is not possible to simply convert allowances to wages without requiring actual work in return. Additionally, failing to comply with labor laws requires attention to restrictions on working hours for minors, limitations on hazardous work, requirements for work permits in some states, and adherence to minimum wage laws.

Advanced strategies for maximum savings

Beyond basic Hiring kids strategies, several advanced approaches can maximize your tax savings while providing additional benefits for your family.

Family management companies

For businesses structured as corporations or non-spousal partnerships, establishing a family management company can unlock additional benefits. This separate entity, typically structured as a sole proprietorship or spousal partnership, provides management services to your primary business while employing your children.

The family management company can:

• Employ children with full payroll tax exemptions
• Provide management, consulting, or administrative services
• Implement additional tax strategies like Health reimbursement arrangements
• Offer Employee achievement awards to family members

Combining with retirement planning

The Hiring kids strategy becomes even more powerful when combined with retirement planning. Children with earned income can contribute to retirement accounts, creating additional tax benefits:

Roth IRA contributions:

• Children can contribute up to $6,500 (2024 limit) to a Roth IRA
• Contributions are made with after-tax dollars but grow tax-free
• Early contributions can grow significantly over decades

Traditional IRA contributions:

• May provide additional tax deductions
• Can further reduce the child's current-year tax liability
• Provides retirement security for the child's future

Integration with other tax strategies

The Hiring kids strategy works exceptionally well when integrated with other tax planning strategies. The Augusta rule permits you to rent your home to a business for meetings and training purposes. Qualified educational assistance programs provide tax-free educational benefits to your children. Travel expenses can be claimed when children accompany you on business trips. Home office deductions maximize deductions for home-based businesses where children work from home.

Special considerations for different business types

The Hiring kids strategy applies differently depending on your business structure, requiring tailored approaches for maximum effectiveness.

Schedule C businesses

Schedule C businesses enjoy the most advantageous treatment for Hiring kids:

• Full payroll tax exemptions for children under 18 (Social Security and Medicare)
• FUTA exemptions for children under 21
• Direct business deductions for wages paid
• Simplified implementation without complex entity structures

S Corporations

S Corporations face additional complexity, but can still benefit from Hiring kids:

• All payroll taxes apply regardless of the child's age
• Reasonable compensation requirements still apply
• Potential for a family management company to maximize benefits
• Income-shifting benefits remain available

Partnerships

Partnership treatment depends on the partnership structure:

Spousal partnerships: Receive the same benefits as Schedule C businesses, including full payroll tax exemptions.

Non-spousal partnerships: Face the same limitations as corporations, with all payroll taxes applying.

C Corporations

C Corporations can implement Hiring kids strategies, but with limitations:

• All payroll taxes apply to children's wages
• Double taxation concerns may affect strategy effectiveness
• Family management company structures can provide additional benefits
• Deductibility of wages provides some tax advantages

Technology and tools for implementation

Modern technology can significantly simplify the implementation and management of Hiring kids strategies.

Payroll management systems

These platforms help automate compliance, generate W-2s, and maintain audit-ready records, essential when hiring family members. Professional payroll systems ensure compliance and accurate record-keeping:

• Gusto: Comprehensive payroll solution with family employee features
• ADP: Enterprise-level payroll management with compliance tools
• QuickBooks Payroll: Integrated solution for small businesses
• Paychex: Full-service payroll with HR support

Time tracking and documentation

Accurate time tracking is crucial for IRS compliance:

• TSheets: Cloud-based time tracking with mobile apps
• Clockify: Free time tracking with detailed reporting
• Harvest: Time tracking with project management integration
• Manual systems: Traditional time cards and logs

Tax planning software

Advanced tax planning tools can optimize your Hiring kids strategy:

Instead provides comprehensive tax planning capabilities, including automated Hiring kids calculations, integration with other tax strategies, compliance documentation tools, and professional guidance and support.

Working with tax professionals who understand these strategies can ensure optimal implementation while maintaining compliance with all IRS requirements.

Start maximizing your tax savings today

The Hiring kids strategy represents one of the most powerful tax-saving opportunities available to business owners. By legally employing your children, you can shift income to lower tax brackets while taking advantage of significant payroll tax exemptions that can save thousands of dollars annually.

Don't let another tax year pass without implementing this strategy. Get started with Instead today and discover how much you can save by hiring your children in your business. Our platform automatically calculates your potential savings and guides you through the implementation process with expert support every step of the way.

Take action now to secure your family's financial future while reducing your tax burden. The sooner you start, the more you'll save over the long term.

Frequently asked questions

Q: Can I hire my children if I operate as an S Corporation?

A: Yes, but you won't receive the same payroll tax exemptions available to Schedule C businesses. All payroll taxes apply regardless of the child's age, though you still benefit from income shifting and business deductions.

Q: What's the maximum amount I can pay my child without triggering taxes?

A: For 2024, a child can earn up to $14,600 (the standard deduction amount) without owing federal income tax, assuming they have no other income sources.

Q: How do I prove the work my child performs is legitimate?

A: Maintain detailed documentation, including time logs, work samples, job descriptions, and photographs or videos of work being performed. Treat the employment relationship as professionally as you would any other employee.

Q: Can I hire my child if they're already working for someone else?

A: Yes, but you must ensure their total earnings from all sources are considered when calculating tax implications. The work for your business must be genuine and not interfere with their other employment.

Q: What happens if my child doesn't want to work, but I like the tax benefits?

A: The IRS requires genuine work to be performed. You cannot simply pay your child for tax benefits without requiring actual services in return. Consider age-appropriate tasks that align with their interests and abilities.