Hiring your children to work for your business is one of the most talked-about tax strategies for business owners. It’s also one of the most misunderstood.
The basic concept sounds appealing — pay your child wages for legitimate work, your business gets a deduction, and your child pays little to no tax on that income. In 2025, children can earn up to $15,750 without owing federal income tax, thanks to the standard deduction.
But here's what most online advice gets wrong: the actual tax benefits depend almost entirely on your business structure.
The strategy works very differently for sole proprietors than it does for S-Corporation or LLC owners, and those differences determine whether you'll save $5,000 in taxes or barely break even after payroll costs.
For business owners earning six figures or more, understanding these structural differences isn't optional, it's the difference between a legitimate tax strategy and administrative headaches that outweigh any benefit.
If you operate as a sole proprietorship or single-member LLC (taxed as a sole proprietorship), the IRS offers something valuable: wages paid to your child under 18 are exempt from Social Security and Medicare (FICA) taxes. You also avoid Federal Unemployment Tax (FUTA) if they're under 21.
Let's look at the real numbers.
Say you hire your 16-year-old to manage your social media, handle basic admin tasks, or organize your digital files. You pay them $12,000 annually for legitimate, documented work.
For a sole proprietor:
If you're in the 24% tax bracket, that $12,000 deduction saves you $2,880 in federal income tax alone, plus you avoid $1,836 in combined FICA taxes (15.3% of $12,000).
Total tax savings: $4,716
For sole proprietors in higher tax brackets, this is one of the cleanest tax strategies available. The business gets the deduction, nobody pays payroll taxes, and your child earns tax-free income that can go toward savings, education, or a Roth IRA.
This is where social media gets it wrong, and where most business owners need to pay attention.
If your business operates as an S-Corp or multi-member LLC taxed as a partnership, you cannot avoid payroll taxes when hiring your children. These entity structures create a separate legal entity, and the IRS doesn't extend the FICA exemption to wages paid by corporations, even to your own children under 18.
For S-Corp owners, the rules are:
Let's run the same $12,000 scenario through an S-Corp:
For an S-Corp owner:
If you're in the 24% bracket, that $12,000 deduction saves you $2,880 in income tax. But you're paying $1,836 in combined FICA taxes.
Net tax savings: $1,044
That's still a win. You're shifting income from your high tax bracket to your child's zero-percent bracket. But it's not the tax-free windfall social media promises. You're getting about 35% of the benefit a sole proprietor would get from the same strategy.
For many S-Corp owners earning six figures, that narrower margin means this strategy only makes sense when there's genuine work that needs doing.
The IRS doesn't object to family employment. They object to fabricated arrangements designed purely for tax avoidance.
Red flags that trigger audits:
What passes IRS scrutiny:
Think of it this way: if the IRS audits you, could you explain exactly what work your child performed and why it was worth what you paid them? If yes, you're probably fine. If not, don't do it.
The work doesn't have to be complicated. Organizing files, basic data entry, social media management, helping at events, cleaning equipment are all legitimate for age-appropriate children. But it does have to be real.
Hiring your children becomes exponentially more valuable once they're in college.
Once your child turns 18, you lose the FICA exemptions regardless of entity structure. But you unlock something more valuable: the ability to shift significant income while they're building financial independence.
Income shifting at scale: You can pay them more for legitimate work. A college student can handle admin, marketing, customer service, project management — real business functions worth $20,000-$35,000 annually. You're moving income from your 32-37% tax bracket to their 10-12% bracket.
Roth IRA contributions: Your child can contribute up to $7,000 (2025 limit) to a Roth IRA from their earned income. That's tax-free retirement growth starting in their early 20s.
Real-world experience: Your child gains legitimate work experience in your industry, understands business operations, and develops professional skills.
We work with clients who pay college-aged children $25,000-$40,000 annually for legitimate roles. One client, a consultant, hired their 20-year-old to manage scheduling, client communications, and proposal drafting — work that genuinely helped the business while giving their child income that went toward tuition and Roth IRA contributions.
If your children are still young, here's how to think about this strategy over time:
Ages 7-12 (Sole Proprietors/Single-Member LLCs): Limited but legitimate opportunities exist. Simple tasks like organizing files, sorting mail, basic data entry. Keep wages modest ($2,000-$5,000 annually), document everything, and treat it as teaching them about work and money.
Ages 13-17 (Prime Window for Sole Proprietors): This is where sole proprietors can maximize the strategy. Teenagers can handle social media management, admin data entry, customer service, event help, and more substantial work. You can pay up to the standard deduction ($15,750 in 2025) with zero FICA and zero income tax.
Ages 18+ (Best for S-Corp and LLC Owners): Since you're paying FICA regardless, wait until your children can perform substantial, skilled work. College years are ideal. Pay market rates for real work, shift significant income, and help them build financial independence.
The strategic question isn't "Can I hire my kids?" — it's "When does hiring my kids create enough tax benefit to justify the administrative work?"
For sole proprietors with teenagers, the answer is often "yes." For S-Corp owners, the answer usually becomes "yes" once kids are older and can handle more substantial roles.
This strategy requires real administrative work that many business owners underestimate.
You need to:
For a sole proprietor hiring a teenager who can save $4,000-$5,000 in taxes while paying them $12,000-$15,000? The administrative work is usually worth it.
For an S-Corp owner where the net benefit is $1,000-$2,000 on that same $12,000 payment? You need to honestly assess whether the burden justifies the savings. Many S-Corp owners find this strategy makes more sense when their children are older and earning $20,000+.
The "oopsie" approach: Hiring your 6-year-old because TikTok said it works, with no documentation, no real work, and wages that make no sense. This is audit bait.
The casual payment problem: Paying your child through Venmo or cash without running proper payroll. The IRS requires W-2s and payroll tax filings. Period.
The unreasonable compensation trap: Paying your teenager $40,000 for part-time social media work when the market rate is $20,000. The IRS will disallow the excess.
The "I'll document it later" disaster: Planning to recreate time logs if you get audited. The IRS wants contemporaneous documentation — records created at the time work was performed.
Consider hiring your children if:
✓ You're a sole proprietor or single-member LLC with children ages 13-17
✓ You have real work that needs doing (not fabricated tasks)
✓ You're comfortable maintaining proper payroll documentation
✓ You're in the 24%+ tax bracket (where income shifting matters most)
✓ Your children are college-aged and capable of substantial work
Think twice if:
✗ You're an S-Corp owner with young children (minimal net benefit after FICA)
✗ You don't have legitimate work that matches your child's capabilities
✗ You're not willing to maintain proper documentation
✗ You're in a lower tax bracket where income shifting provides minimal benefit
✗ The administrative burden exceeds the tax savings
Strong indicator this is worth doing:
You have real work that needs doing
+ Your children can competently do it
+ The tax savings exceed the administrative cost
+ You're willing to maintain proper records
= Implement this strategy.
Hiring your children is a legitimate, IRS-approved tax strategy when implemented correctly for your specific business structure.
For sole proprietors with teenagers, this strategy can deliver meaningful tax savings with minimal compliance risk. For S-Corp owners, the benefits are narrower but can still be valuable, especially with college-aged children performing substantial work.
The viral posts aren't entirely wrong, they're just dangerously incomplete. The strategy works. It just doesn't work the way social media makes it sound, and the details of your business structure matter more than those 30-second videos let on.
Considering hiring your children? We can help you evaluate whether it makes sense for your business structure, and how to maximize the benefits while minimizing compliance risk. Schedule a consultation today to discuss your options.
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