One of the more interesting questions I get now and then is "I heard that I can hire my kid and save on my taxes. Is that true?" The answer to that is yes - IF you follow the IRS rules. I think their is a better reason to hire your children, though. It is the best education they can learn to prepare them for life after they move out of your house - from either an employee's point of view or a business owner's point of view or both.
Here’s what you need to know.
Let's start with the tax benefits
- If you follow IRS rules, hiring your child to work for your business can lower your taxable income as you can deduct their salaries from your business income.
- If your child is under 18, and depending on the type of business you have, you won’t have to take Social Security and Medicare taxes from their pay.
- Your child won’t have to pay taxes if their income for a given tax year is less than the standard deduction amount for that year (e.g., $15,000 for 2025).
- Because your child will have earned income, you can contribute to an IRA on their behalf subject to applicable IRA contribution limits.
Now, on to the IRS rules
- Providing work that is beneficial, fitting, and recognized in your industry. It doesn't have to be complicated.
- Work that your child might consider easy to do like adding data to a spreadsheet or posting to social media accounts that can be useful for your business.
The work should also be age-appropriate. If your child is skilled in a particular area, have them help with tasks related to that skill. For instance, if your 12-year-old excels at math and loves numbers, they might review expense calculations or verify invoices. However, if your 9-year-old doesn’t know the medical field, it wouldn't make sense for them to review medical claims for you.
On the other hand, from a tax perspective, it could be difficult to justify a 7-year-old young child doing office work.
It needs to be reasonable compensation. When hiring your children to work for your business, it is important to compensate correctly. Paying your child a wage similar to what you would pay a worker who performs similar services is recommended. If you are unsure about a fair wage for certain work, consulting with colleagues or staffing agencies might help. Websites that list comparable salaries can be useful as well.
On the flip-side, it's important not to overpay your child for the work they perform for your business. For example, the 8-year-old who helps dust your office wouldn’t realistically make $25 an hour. But that $25/hour rate might be the industry standard for your 16-year-old who designs necklaces for your online accessory business.
Claiming an unrealistic wage for the work your child performs could raise a red flag with the IRS and that is not worth the money you might save.
Considerations for different business types
When you hire your child to work for your business, the applicable taxes may vary depending on your business type. Regardless of age, however, payments to your child for work are always subject to income tax withholding.
If the one parent has a sole proprietorship or both parents are in a partnership and the child in under age 18, they are not subject to Social Security and Medicare taxes. If the child is age 18 or older, they are subject to them.
If your child is under the age of 21 when working for your business that is a sole proprietorship or both parents are in a partnership, your child's pay wouldn't be subject to Federal Unemployment Tax (FUTA).
If your business is a corporation, partnership (not as described above), or estate, payments to your child are subject to income tax withholding, Social Security, Medicare, and FUTA taxes, regardless of the child’s age.
Document, Document, Document
As your child's employer, you must follow employment and labor laws. According to the Department of Labor, “children are generally permitted to work for businesses entirely owned by their parents.”
But you still need to pay attention to Federal and state child labor laws for other rules, such as Federal child labor laws prohibit children under certain ages from working in certain occupations and all children from working in hazardous conditions.
For documentation, your need to fill out the necessary forms such as the W4 with proper Social Security numbers and EINs (Employer Identification Numbers). You need to Issue a Form W2 to document your child's pay. You also need to document your child’s work hours and include dates and detailed descriptions of tasks performed.
If your child is over 18 and you are treating them as an independent contractor, it would be a good idea to have a signed contract that outlines their work responsibilities, have them fill out a Form W9 and issue a 1099-NEC as required.