The conversation around tax optimization strategies tends to overlook one particularly powerful approach for entrepreneurial parents: hiring your own child. As we approach 2025, this strategy deserves renewed attention for its dual benefits of tax savings and wealth-building opportunities for families.
I’ve spent years tracking various tax optimization techniques, and this one consistently surprises business owners when I explain it at conferences. During a recent blockchain symposium in Miami, a fellow attendee—who runs a small digital marketing agency—was astonished to learn she could legitimately employ her 14-year-old son to manage her company’s social media presence.
“You mean I can actually pay him a reasonable salary, deduct it as a business expense, and help him start building retirement savings—all legally?” she asked. The answer is yes, and the benefits extend far beyond what most parents realize.
The core concept is straightforward: business-owning parents can hire their children, pay them reasonable wages for legitimate work, deduct those wages as business expenses, and potentially reduce their overall tax burden while teaching their children valuable skills and financial responsibility.
The Financial Mechanics
When structured properly, hiring your child creates a triple tax advantage. First, your business can deduct their wages as a legitimate business expense, reducing your taxable income. Second, depending on your business structure and your child’s age, you might avoid paying certain employment taxes. Third, your child can earn income—potentially tax-free up to certain thresholds—while gaining real-world work experience.
According to data from the Tax Foundation, a child can earn up to $13,850 in 2023 without owing federal income tax due to the standard deduction. While 2025 figures aren’t finalized yet, this threshold typically increases annually with inflation adjustments.
“This strategy essentially shifts income from your higher tax bracket to your child’s lower or zero tax bracket,” explains Sheila Weinberg, a certified public accountant specializing in small business taxation. “For sole proprietors, single-member LLCs, and partnerships where both partners are the child’s parents, there’s an additional benefit: no FICA taxes on wages paid to children under 18.”
Implementation Requirements
Before rushing to put your five-year-old on the payroll, understand that the IRS has clear guidelines to prevent abuse of this strategy:
- The work must be legitimate and appropriate for your child’s age and abilities
- The compensation must be reasonable for the services provided
- Proper documentation is essential, including W-4 forms, timesheets, and regular payments
- Your child must actually perform the work you’re paying them for
“The biggest mistake I see is parents treating this as free money without maintaining proper documentation,” notes Marcus Cheng, tax attorney and contributor to the Journal of Accountancy. “The IRS looks closely at family employment arrangements, so treat this like any other employer-employee relationship with appropriate record-keeping.”
Beyond Tax Savings: Building Generational Wealth
Perhaps the most overlooked aspect of this strategy is its potential for long-term wealth building. When your child earns income, they become eligible to contribute to retirement accounts like Roth IRAs.
Consider this scenario: A 15-year-old earning $6,000 annually who contributes that full amount to a Roth IRA for just four years (ages 15-18) and never adds another penny would have approximately $259,000 at age 65, assuming a 7% annual return. That’s the power of compound growth over fifty years.
“Starting retirement savings in the teenage years creates a tremendous advantage through compound interest,” explains financial educator Janet Torres. “Most adults wish they’d started saving earlier—this strategy makes that possible for your children while teaching them about work ethic and financial responsibility.”
Real-World Applications
The range of legitimate jobs for children depends on their age, abilities, and your business type. Common examples include:
For younger children (under 12):
- Office cleaning and organization
- Basic filing and document sorting
- Simple product assembly or packaging
For teenagers:
- Social media management
- Website maintenance
- Content creation
- Customer service
- Administrative tasks
- Inventory management
One entrepreneur I interviewed at a recent finance conference pays her 16-year-old daughter to create TikTok and Instagram content for her e-commerce business. “She’s better at it than I am, and she’s building a portfolio of digital marketing work while earning money for college,” she explained.
Potential Pitfalls and Compliance Considerations
While powerful, this strategy isn’t without risks. The IRS scrutinizes family employment arrangements, particularly when they appear designed primarily to avoid taxes rather than fulfill legitimate business needs.
Common red flags include:
- Paying unreasonably high wages for simple tasks
- Employing very young children for sophisticated work
- Lacking documentation of hours worked and duties performed
- Inconsistent payment patterns
“The key is reasonableness,” emphasizes tax policy researcher Calvin Johnson. “If you’re paying your 10-year-old $50,000 annually to stuff envelopes, expect questions during an audit. But $1,000 for legitimate office work throughout the year? That’s defensible.”
Looking Ahead: 2025 Considerations
As we approach 2025, several factors make this strategy particularly relevant:
First, with scheduled changes to tax provisions under the Tax Cuts and Jobs Act, many families may face different tax situations. Second, as digital entrepreneurship continues growing, more parents have business structures that can implement this strategy. Third, rising education costs make early financial planning for children increasingly important.
The hire-your-child strategy represents a rare win-win in tax planning: legitimate tax savings for parents combined with valuable life lessons and financial foundations for children. When implemented with proper documentation and reasonable compensation, it’s a powerful tool for family wealth-building that remains underutilized by many eligible business owners.
As with all tax strategies, consult with a qualified tax professional to ensure your specific implementation meets current IRS requirements and aligns with your broader financial goals.
