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Valor Tax Relief Team
Professional Tax Resolution Specialists
As a parent, you're always looking for ways to teach your children valuable life lessons about money, responsibility, and work ethic. One powerful strategy that combines family values with smart tax planning is hiring your kids to work in your family business or household operations.
This approach not only provides your children with hands-on experience and essential life skills, but it can also create significant tax advantages for your family. However, to maximize these benefits while staying compliant with IRS regulations, you need to understand the specific rules and requirements that govern family employment.
Key Benefits of Hiring Your Kids
Life Skills Development
Your children learn responsibility, punctuality, teamwork, and financial literacy through hands-on work experience that will serve them throughout their lives.
Tax Savings
Deduct their wages as legitimate business expenses while your child may pay little to no federal income tax on their earnings, creating significant family tax savings.
Family Bonding
Working together strengthens family relationships and creates shared experiences while building a strong work ethic and entrepreneurial mindset.
Early Retirement Planning
Earned income allows your child to contribute to a Roth IRA, starting their retirement savings journey decades earlier than most people.
Ensuring Legitimate Work Requirements
Critical IRS Requirement
The work must be legitimate, necessary for your business, and appropriate for your child's age and skill level. The IRS closely scrutinizes family employment arrangements.
Age-Appropriate Tasks
- Ages 7-12: Filing, organizing, basic cleaning, simple data entry
- Ages 13-15: Customer service, social media management, inventory tracking
- Ages 16+: Administrative tasks, bookkeeping assistance, marketing support
Documentation Requirements
- Detailed job descriptions for each position
- Time sheets showing hours worked and tasks completed
- Pay stubs and payroll records
- Photos or videos of work being performed (optional but helpful)
Setting Reasonable Compensation
Fair Market Value
The IRS expects you to pay a rate similar to what you'd pay an unrelated employee for the same work. Research local wages for similar positions to establish fair compensation.
Research Local Wages
Check job boards, government wage data, and local business associations for comparable positions.
Calculate Hourly Rates
Consider experience level, task complexity, and local market conditions when setting rates.
Document Justification
Keep records showing how you determined the wage rate and why it's reasonable for the work performed.
Understanding Tax Implications
Business Structure Impact
| Business Type | FICA Taxes | FUTA Taxes | Notes |
|---|---|---|---|
| Sole Proprietorship | Exempt if child under 18 | Exempt if child under 21 | Most favorable for family employment |
| Partnership (with spouse) | Exempt if child under 18 | Exempt if child under 21 | Same benefits as sole proprietorship |
| Corporation | Required for all ages | Required for all ages | Full employment tax obligations |
| Partnership (non-spouse) | Required for all ages | Required for all ages | Full employment tax obligations |
Sole Proprietorship
Partnership (with spouse)
Corporation
Partnership (non-spouse)
Employment Tax Considerations
FICA Tax Exemptions
- • Under 18: No Social Security or Medicare taxes for sole proprietorships and spouse partnerships
- • All ages in corporations: FICA taxes required regardless of age
- • Savings potential: 7.65% of wages (employer portion of FICA)
FUTA Tax Exemptions
- • Under 21: No Federal Unemployment Tax for sole proprietorships and spouse partnerships
- • All ages in corporations: FUTA taxes required regardless of age
- • Savings potential: 6% of first $7,000 in wages
Income Tax Requirements
2025 Standard Deduction
$15,750
Standard deduction for single filers in 2025
Below Standard Deduction
- • No federal income tax owed
- • No tax return required
- • Can still claim as dependent
- • Perfect for Roth IRA contributions
Above Standard Deduction
- • Must file tax return
- • May owe federal income tax
- • Can still claim as dependent
- • Consider tax planning strategies
Roth IRA Opportunities
Start Retirement Planning Early
Earned income from working for your business allows your child to contribute to a Roth IRA, giving them a massive head start on retirement savings.
Example: $3,000 Annual Contribution
If your 16-year-old contributes $3,000 annually to a Roth IRA:
- • Age 16-65: 49 years of contributions
- • Total contributed: $147,000
- • Estimated value at 65: $1.2+ million (assuming 7% annual return)
- • Tax-free withdrawals: All growth is tax-free in retirement
Frequently Asked Questions
What age can my child start working for my business?
There's no minimum age requirement from the IRS, but the work must be legitimate and age-appropriate. Most parents start with simple tasks around age 7-8, progressing to more complex responsibilities as the child matures.
How much can I pay my child without them owing taxes?
In 2025, children can earn up to $15,750 (the standard deduction) without owing federal income tax. However, they must still file a return if they have unearned income above $1,250 or if their total income exceeds certain thresholds.
Can I still claim my child as a dependent if they work for me?
Yes, you can still claim your child as a dependent as long as they rely on you for financial support and meet the other dependency requirements. Working for your business doesn't affect their dependent status.
What if my business is a corporation?
If your business is a corporation, you must pay FICA and FUTA taxes regardless of your child's age. This eliminates most of the tax benefits, so consider converting to a sole proprietorship or spouse partnership if possible.
Do I need to issue a W-2 to my child?
Yes, if you pay your child more than $600 in a year, you must issue a W-2. Even if under $600, it's good practice to maintain proper payroll records and consider issuing a W-2 for documentation purposes.
What records should I keep for IRS compliance?
Maintain detailed records including job descriptions, time sheets, pay stubs, bank statements showing payments, and documentation of work performed. Photos or videos of your child working can also help substantiate the legitimacy of the employment.
Can my child work for multiple family businesses?
Yes, your child can work for multiple family businesses, but each position must be legitimate and properly documented. The same tax rules apply to each employment relationship, and you must ensure all work is necessary and age-appropriate.
Need Help with Family Business Tax Planning?
Our tax professionals can help you set up proper family employment structures and maximize your tax benefits while staying compliant with IRS regulations.
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