If you own a business, hiring your kids can be one of the cleanest tax moves available. Money you'd otherwise spend on them comes out of the business as a wage deduction, lands in their pocket at their tax rate (often zero), and can fund a Roth IRA they'll thank you for in fifty years. The catch is that it has to be a real job, paid a real wage, and done with real paperwork.
Why this works
Your business deducts the wage. Your child reports it as earned income. The federal standard deduction is around $15,000 a year, so a kid earning up to that amount pays zero federal income tax. You just moved that money out of your top tax bracket and into a 0% bracket.
The payroll-tax break (only in the right structure)
If your business is a sole proprietorship or a partnership where both partners are the child's parents, wages paid to your child under age 18 are exempt from Social Security and Medicare. Under 21, they're also exempt from federal unemployment.
The four things the IRS will look at
- Real work. The kid has to actually do something the business needs (filing, modeling for marketing photos, cleaning, light office work, social media). It has to be age-appropriate and documented.
- Reasonable wage. What you'd pay an unrelated person for the same work. Don't pay your 8-year-old $50/hour to file papers.
- Timesheets. Hours worked, work performed, dates. Contemporaneous, not reconstructed.
- Paid like an employee. Actual paycheck to the child's account, W-2 at year-end, withholding (or proof of exemption).
The Roth IRA bonus
Earned income lets your child fund a Roth IRA up to the lesser of their wages or the annual limit ($7,000 in 2024). Decades of tax-free growth on what's effectively your money. The most underrated piece of this strategy.
The bottom line
Done right, this strategy pays your kids out of pre-tax dollars and funds their first retirement account. Done wrong, the IRS treats the wage as a gift and disallows the deduction. A Breadify membership sets up the entity, the documentation, and the Roth. The savings cover the work many times over.