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Can You Hire Your Kids? A Parent's Guide to Family Employment

There is a tax strategy that sounds too good to be true: hire your kids, deduct their wages as a business expense, and they pay zero federal income tax on the first $15,350 they earn. The best part is that it is completely legal. The IRS specifically allows it, and millions of family businesses use it every year.

But this is not just about saving on taxes. When you hire your child, you create real-world financial education that no app or textbook can replicate. Your kid learns what it means to earn money, manage a paycheck, and eventually file a tax return. Here is how to do it right.

The tax math: why this works

When you run a sole proprietorship or single-member LLC and hire your child under 18, the IRS gives you three distinct advantages:

1. Your business deducts the wages. Every dollar you pay your child is a business expense, reducing your taxable income.
2. Your child pays no income tax on the first $15,350 (the 2025 standard deduction). If they earn less than that, their federal tax bill is zero.
3. No FICA taxes. Under IRS code section 3121(b)(3)(A), wages paid by a sole proprietor to their child under 18 are exempt from Social Security and Medicare taxes. That saves 15.3% right off the top.

Here is a concrete example. Say you are in the 24% tax bracket and you pay your 14-year-old $12,000 for the year. You save $2,880 on your income taxes (24% of $12,000). You also skip $1,836 in FICA taxes (15.3% of $12,000). Your child owes $0 in federal income tax. Total family tax savings: $4,716. That money stays in your family instead of going to the IRS.

Which business structures qualify

Not every business type gets the full benefit. Here is the breakdown:

• Sole proprietorship: Full benefit. No FICA for children under 18. This is the simplest setup.
• Single-member LLC (taxed as sole prop): Same as above. Full benefit.
• Partnership (both parents are partners): Full benefit, as long as no non-parent partners are involved.
• S-Corp or C-Corp: You can still deduct your child's wages, but you will owe FICA taxes on them. The payroll tax exemption does not apply.
• Multi-member LLC with non-parent members: Same as S-Corp. FICA applies.

If you run an S-Corp and want the FICA exemption, some tax professionals suggest creating a separate sole proprietorship management company that hires your children and contracts services back to the S-Corp. Talk to your CPA before setting this up.

Age-appropriate jobs your kids can actually do

The IRS requires that the work be real and the pay be reasonable. You cannot hand your 8-year-old $500/week for "helping out." But there are plenty of legitimate tasks at every age.

Ages 7-10:

• Shredding documents ($8-10/hour)
• Organizing supplies, inventory, or files
• Cleaning the office or workspace
• Stuffing envelopes or assembling mailings
• Simple product photography with a phone

At this age, a chore chart is a great way to build the habit of tracking tasks and getting paid for completed work. It bridges the gap between household chores and actual employment.

Ages 11-14:

• Data entry and spreadsheet work ($10-14/hour)
• Social media content creation (photos, short videos)
• Answering customer emails with a template
• Managing inventory or restocking
• Website updates (basic text and image changes)

If your child is interested in starting something on the side, the lemonade stand calculator teaches them to think about profit margins, pricing, and costs before jumping in.

Ages 15-17:

• Bookkeeping and basic accounting ($12-18/hour)
• Customer service and phone support
• Graphic design or marketing materials
• Shipping, packaging, and order fulfillment
• Research and competitive analysis

Teens who are comparing this to a traditional part-time job can use the first job finder to see how family employment stacks up against retail or food service work.

How to set it up correctly

Cutting corners here is what gets people in trouble with the IRS. Follow these steps:

1. Get your child a Social Security number (they probably already have one from birth).
2. Write a real job description. List specific duties, hours, and pay rate.
3. Set a reasonable pay rate. Research what a non-family employee would earn for the same work in your area. The Department of Labor's minimum wage is the floor.
4. Pay by check or direct deposit. Never pay cash with no paper trail.
5. Keep time sheets. Even a simple spreadsheet that logs date, hours, and tasks is enough.
6. File a W-2 for your child at year-end, just like any other employee.
7. Have your child file a tax return if their income exceeds the filing threshold, even if they owe nothing.

Help your child divide their paycheck into saving, spending, and investing categories. The wants vs. needs sorter can help younger kids figure out the difference, while the budget planner works well for teens who are managing real income for the first time.

The Roth IRA advantage

Here is where family employment gets really powerful. Any child with earned income can contribute to a Roth IRA, up to $7,000 per year (2025 limit) or their total earned income, whichever is less.

The math is staggering. If your 14-year-old contributes $5,000/year to a Roth IRA for just 4 years (ages 14-17), that $20,000 grows to roughly $340,000 by age 65 at an 8% average annual return. All of it comes out tax-free in retirement. They will never find a better deal than starting this early.

Use the compound interest calculator to show your child exactly how their early contributions grow over time. Seeing the numbers makes the concept real in a way that lectures cannot.

Common mistakes to avoid

• Paying too much. A 10-year-old earning $25/hour to sweep a floor will raise red flags. Pay what the job is worth.
• No documentation. If you cannot show time records, job descriptions, and payment records in an audit, the IRS can reclassify the wages as gifts.
• Paying for chores, not business work. Cleaning their bedroom is a chore. Cleaning your business office is employment. The work must be for your business, not your household.
• Forgetting state rules. Some states have stricter child labor laws than the federal exemption. Check your state's Department of Labor website before starting.
• Skipping the W-2. Even if your child owes no tax, you still need to file a W-2 and report the wages on your business return.

More than a tax strategy

The families who get the most out of this are not the ones focused purely on tax savings. They are the ones who use employment as a teaching tool. When your child earns real money for real work, conversations about saving, spending, and investing happen naturally. You do not have to manufacture lessons. The paycheck does it for you.

A 2019 study from the University of Arizona found that children who had financial experiences (earning, saving, and spending their own money) showed significantly better financial behaviors as young adults compared to those who only received financial instruction in a classroom. Real experience beats theory every time.

Start with the allowance calculator to figure out a baseline for what your child should be earning at their age. Then decide which tasks from your business they can realistically take on.

Sources

• IRS: Family Help - Hiring Family Members
• IRS Publication 929: Tax Rules for Children and Dependents
• IRS: IRA Contribution Limits
• U.S. Department of Labor: Child Labor Provisions
• University of Arizona: Financial Socialization and Young Adult Financial Behavior (2019)

Give your kids real money practice

Penny Time helps kids track their earnings, set savings goals, and learn to manage money they actually worked for. Free for the whole family.

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