Hiring Your Child in Your Business: The Tax Strategy Explained

In This Article

1. Why Does Hiring Your Child in Your Business Save Taxes?
2. What Are the IRS Requirements for Hiring Your Child?
3. FICA Exemption for Children Under 18
4. How Does the Kiddie Tax Affect the Hire-Your-Child Strategy?
5. How Can I Use My Child's Wages to Fund a Roth IRA?
6. What Are the NJ-Specific Payroll and Employment Requirements for Hiring Your Child?
7. Step-by-Step Implementation Checklist
8. What Are the Most Common Mistakes When Hiring Your Child in Your Business?
9. Frequently Asked Questions
10. Ready to File With Confidence?

Why Does Hiring Your Child in Your Business Save Taxes?

When your business pays your child a reasonable wage for real work, two things happen simultaneously:

1. Your business deducts the wages, reducing your taxable income at your marginal rate (potentially 22%, 24%, 32%, or higher)
2. Your child reports the income, but pays tax at their own lower rate, and the first $15,750 (2025 standard deduction) is entirely tax-free

The net result: dollars that would have been taxed at your high marginal rate are effectively shifted to a 0% bracket. For a business owner in the 32% bracket paying a child $15,750 in wages:

• Business deduction saves: $15,750 × 32% = $5,040 in federal income tax
• Child's federal income tax on $15,750: $0 (fully offset by standard deduction)
• Net federal tax savings: $5,040

That same $15,750 can also be contributed to a Roth IRA in the child's name (since they now have earned income), creating decades of tax-free growth.

What Are the IRS Requirements for Hiring Your Child?

1. The Work Must Be Real

The IRS will disallow the deduction if the work is fabricated or inflated. Your child must perform genuine services that a business would reasonably pay for.

Legitimate tasks for children by age range:

• Ages 7–11: Shredding documents, light filing, cleaning the office, stuffing envelopes, running errands
• Ages 12–15: Data entry, social media content creation and scheduling, photography for business use, basic bookkeeping under supervision
• Ages 16–18: Customer service, website maintenance, graphic design, video editing, bookkeeping, administrative support

Keep a log or timesheet showing dates worked, hours, and tasks performed. Pay them by check or direct deposit, never cash.

2. The Wage Must Be Reasonable

You must pay a reasonable wage: the same amount you would pay an outside contractor or employee for the same work. Paying your 10-year-old $80,000 to 'help with social media' will not survive scrutiny.

As a benchmark: what would you pay on Upwork or through a staffing agency for the same tasks? Document your reasoning.

3. The Child Must Actually Receive the Money

Paying wages that never actually transfer to the child (paper wages) is tax fraud. The child must have their own bank account, and deposits must be made to it. The child can then spend the money as they wish, including contributing it to a Roth IRA.

FICA Exemption for Children Under 18

Under IRC Section 3121(b)(3)(A), wages paid to a child under age 18 by a parent's sole proprietorship are completely exempt from FICA taxes (both the 6.2% Social Security tax and the 1.45% Medicare tax, on both the employer and employee sides). This exemption also applies to partnerships owned entirely by both parents of the child. Separately, under IRC Section 3306(c)(5), wages paid to a child under age 21 by a parent's sole proprietorship are exempt from FUTA (federal unemployment tax).

When the FICA exemption does NOT apply:

• The business is a corporation (S-Corp or C-Corp)
• The business is an LLC taxed as a corporation or S-Corp
• The partnership includes a non-parent partner

The S-Corp trap: If your business is an S-Corp, you do not get the FICA exemption. Your child's wages are subject to the same FICA withholding as any other employee (7.65% employee side + 7.65% employer side). This reduces, but does not eliminate, the tax benefit of the strategy.

Practical example: A sole proprietor parent pays their 15-year-old child $14,600 (the 2026 standard deduction) for legitimate work in the business. The child owes $0 in federal income tax (wages fully offset by the standard deduction) and $0 in FICA taxes (exempt under IRC Section 3121(b)(3)(A)). The parent deducts the full $14,600 as a business expense, saving $14,600 multiplied by their marginal tax rate. At the 32% bracket, that is $4,672 in federal income tax savings plus the avoided self-employment tax on those dollars.

Example comparison (sole proprietor vs. S-Corp, paying a child $14,600):

The sole proprietor saves more because there is no FICA at all. But even the S-Corp owner saves significantly through income shifting.

How Does the Kiddie Tax Affect the Hire-Your-Child Strategy?

The Kiddie Tax (IRC § 1(g)) is designed to prevent wealthy parents from simply shifting investment income to children. Under the Kiddie Tax, unearned income (dividends, capital gains, interest) above a threshold is taxed at the parent's marginal rate for children up to age 18 (or through age 23 if a full-time student).

Crucially, the Kiddie Tax does not apply to earned income. Wages your child earns from working in your business are taxed at the child's own rate, not the parent's. This is what makes the strategy work.

2025 Kiddie Tax unearned income threshold: $2,500 (the first $1,250 of unearned income is covered by the child's standard deduction; the next $1,250 is taxed at the child's rate; above $2,500, the parent's rate applies).

Practical implication: The wages strategy works cleanly. But if you also want to shift investment income to the child, the Kiddie Tax largely blocks it.

How Can I Use My Child's Wages to Fund a Roth IRA?

Once your child has earned income, they can contribute to a Roth IRA up to the lesser of their earned income or the annual IRA contribution limit ($7,000 in 2025).

A child who contributes $7,000 to a Roth IRA at age 16 and never contributes again will have, assuming 8% average annual returns:

• At age 30: ~$22,500
• At age 50: ~$104,000
• At age 65: ~$330,000, all tax-free

If contributions continue through college and into early adulthood, the compounding is dramatic. The Roth IRA is funded with after-tax dollars (since the child pays zero tax on wages within the standard deduction) effectively meaning these contributions entered the Roth IRA tax-free on both ends.

What Are the NJ-Specific Payroll and Employment Requirements for Hiring Your Child?

New Jersey has its own employment law requirements that apply to businesses with child employees, even family members:

NJ Child Labor Laws

Under NJ Rev. Stat. § 34:2-21, children under 16 must have a working certificate (employment certificate) issued by the school principal or superintendent. Children 14–15 may work in certain businesses with restrictions on hours and types of work.

NJ child labor law exemptions include family businesses: children working for a business owned solely by a parent are generally exempt from the working certificate requirement and many hour restrictions. However, hazardous occupations remain off-limits regardless.

NJ Payroll Taxes

Even if the federal FICA exemption applies, NJ has its own payroll taxes:

• NJ State Income Tax Withholding: Required on all wages paid in NJ, regardless of the child's relationship to the owner. You must withhold NJ GIT from wages and remit to the NJ Division of Taxation.
• NJ Disability Insurance (SDI): Employee contribution (0.14% in 2025) and employer match may apply. Consult the NJ DOL for family business exemptions
• NJ Unemployment Insurance (SUI): Family business exemptions may apply for children under 18 working for a sole proprietor parent, confirm with the NJ DOL

Employer Registration

You must be registered with the NJ Division of Revenue and Enterprise Services as an employer (even if your only employee is your child). You will issue a W-2 at year-end and file NJ-927 quarterly payroll tax returns.

Step-by-Step Implementation Checklist

• [ ] Create a written job description with specific duties
• [ ] Determine a reasonable hourly rate (document your market rate research)
• [ ] Set up a timesheet or work log
• [ ] Open a bank account in the child's name
• [ ] Register as an employer with IRS (EIN) and NJ DOL if not already
• [ ] Set up payroll with proper withholding (NJ GIT at minimum; federal FICA if S-Corp)
• [ ] Pay by check or direct deposit, never cash
• [ ] Issue W-2 in January for the prior year
• [ ] File NJ-927 and federal 941 quarterly payroll returns
• [ ] Consider opening a Roth IRA in the child's name

What Are the Most Common Mistakes When Hiring Your Child in Your Business?

Mistake: Paying wages without doing payroll. Simply giving your child money and calling it wages does not work. You must go through the full payroll process, withholding, deposits, quarterly returns, and W-2.

Mistake: Assuming the S-Corp FICA exemption applies. S-Corp owners frequently try to use this strategy and assume it works like a sole proprietorship. It does not. S-Corp wages are fully subject to FICA.

Mistake: Inflating wages beyond reasonable market rates. The IRS can reclassify inflated wages as gifts, denying the business deduction and potentially triggering gift tax reporting.

Mistake: Not documenting the work performed. If audited, you need to show what work was done, when it was done, and what the business benefit was.

Frequently Asked Questions

Ready to File With Confidence?

Tax rules change frequently. If anything in this guide applies to your situation, a quick review with a CPA can prevent costly mistakes. Greg Monaco is a NJ-licensed CPA (License #20CC04711400) who prepares every return personally.

Schedule a free 30-minute consultation