Hiring Your Child in Your Business: What You Need to Know
Hiring your child in your business can be a powerful strategy — not just for building work ethic and keeping it in the family, but also for smart tax planning. However, it must be done correctly to be compliant and beneficial.
Let’s walk through the rules, requirements, and strategies that make this a win-win for your family and your business.
✅ Yes, You Can Hire Your Child — But It Must Be Real Work at Fair Market Value
The IRS allows business owners to hire their children, but this is not a loophole — it’s a legitimate employment arrangement that comes with very specific guidelines.
Here’s what you need to follow:
🔧 1. The Work Must Be Legitimate and Necessary
Your child must actually perform services for your business that are appropriate for their age and skill level.
✅ Examples of acceptable work:
Filing, scanning, organizing documents
Social media help, content creation, photography
Cleaning the office or warehouse
Packing orders or delivering flyers
Data entry, spreadsheet work, website updates
❌ Not allowed:
Paying them just to shift money to a lower tax bracket
“Work” that has no clear business purpose
Paying for chores or tasks unrelated to business operations
💵 2. Pay Them a Reasonable, Documented Wage
You must pay your child the fair market value (FMV) for the work performed — the same rate you would pay a non-family employee.
✅ Best practices:
Keep timesheets or task logs
Pay regularly via payroll
Issue a W-2 (not a 1099) if they’re an employee
Track wages and withhold taxes properly if required
📌 Bonus: If your business is a sole proprietorship or partnership where both spouses are partners, and your child is under 18, you don’t have to withhold Social Security and Medicare taxes — or pay FUTA. This creates a clean, tax-free opportunity up to the standard deduction.
🧾 3. Their Wages Are Tax Deductible to Your Business
Your business can deduct your child’s wages just like any other employee, reducing your taxable income. Meanwhile, if your child earns less than the standard deduction ($14,600 in 2024), they likely won’t owe federal income tax on their earnings.
💡 Planning Tip: Use Their Earnings for Roth IRA Contributions
If your child has earned income, they can contribute to a Roth IRA — and since their tax rate is likely 0%, this becomes a powerful long-term strategy.
You could:
Help them open a Roth IRA and fund it with part of their wages
Use the rest of the wages for savings, education, or spending
📌 Contribution limit for 2024 is $7,000 or up to the amount of earned income — whichever is less.
🧮 Planning Tip: Shift Taxable Income to a Lower Bracket
Instead of you taking additional income from the business (and paying 24%, 32%, or higher), you can legally shift a portion of income to your child — who likely pays 0% on the first ~$14,600 of earned income in 2024. This reduces overall family tax liability and keeps the money in the family.
🛑 Common Mistakes to Avoid
❌ Paying too much for the type of work performed
❌ Failing to document hours, tasks, and payments
❌ Paying your child under the table (cash only = red flag)
❌ Claiming the deduction but not issuing a W-2
❌ Treating your child as an independent contractor (they’re not)
🧠 Summary: This Can Be a Smart Move — If Done Right
Hiring your child can:
Save taxes
Teach responsibility
Fund future savings
Keep more income in your family
But it must be done with real work, real pay, and real documentation.
Want to make sure you do it right — and make the most of it?
At Dishion & Associates, we help business owners structure family employment the smart way.
Let’s talk about how hiring your child can fit into your broader tax strategy.
