They had kids — and weren't paying them through the business. We set it up correctly: real work, reasonable pay, proper payroll. Income shifted to the kids' lower brackets, the business got the deduction, and the family kept more. Everybody won.
This is the family payroll strategy in real life. Not theory, not a loophole — just the code working as designed for owners who set it up right. The difference between "we have kids" and "our kids are on payroll" is thousands of dollars a year.
How does hiring your kids actually save taxes?
The mechanics are simple. Your business legitimately employs your children for real work. The business deducts their wages — reducing your taxable profit. The kids receive the wages, taxed at their rates, which are far lower than yours (often zero).
You're not creating a deduction out of thin air. You're moving income from your 30%-plus bracket to your kids' bracket, where a chunk of it disappears into the standard deduction entirely.
What's the real math?
Say two kids each earn $14,000 for real work during the year. That's $28,000 of wages the business deducts — at your marginal rate of roughly 30%, that's about $8,400 of tax the business doesn't pay.
On the kids' side: each child gets a standard deduction of roughly $15,000, which can wipe out the income tax on their $14,000 of wages entirely. The $28,000 shifted out of your bracket; almost none of it gets taxed in theirs.
The result: the business deducts the full $28,000, the family keeps the cash, and the tax bill drops by thousands. Every year you run it.
What work can kids actually do?
The work has to be real — things the business genuinely needs, at pay a non-family employee would earn for the same job. For contractors, the list is longer than most owners think:
- Jobsite photos and video for marketing
- Cleaning the shop, trucks, or equipment
- Filing, data entry, organizing receipts
- Managing or posting to social media
- Stuffing envelopes, assembling bid packets
- Basic bookkeeping assistance (older teens)
A 16-year-old running your Instagram and photographing finished jobs is doing real marketing work. A 12-year-old shredding old files and cleaning the office is doing real admin work. Match the job to the age and pay accordingly.
What are the rules you can't skip?
This is where families get in trouble. The rules are non-negotiable:
- The work must be real. No phantom employees. If the IRS asks what your 10-year-old did for $14,000, you'd better have an answer with evidence.
- The pay must be reasonable for the work performed. A 14-year-old doing filing doesn't earn $60/hour.
- Track hours. Timesheets, a simple log — something contemporaneous, not reconstructed in April.
- Run actual payroll. Withholdings, filings, W-2s at year-end. If it's not on payroll, it's not payroll.
One more thing worth knowing: if your business is a sole proprietorship — or a partnership where both partners are the child's parents — wages paid to your child under 18 are exempt from Social Security and Medicare taxes. That exemption does not apply to S-corps or C-corps, where standard payroll taxes apply. Your entity changes the details, so get the setup right for your structure.
How young is too young?
The tax code doesn't set a minimum age — but common sense does. The younger the child, the simpler the work must be, and the better your documentation needs to be. A 7-year-old can stuff envelopes and clean the shop. A 16-year-old can run your social media and photograph jobs. The job has to fit the kid, and the pay has to fit the job.
Whatever the age, the same rules apply: real work, reasonable pay, tracked hours, real payroll. A well-documented 10-year-old doing real filing beats a poorly-documented 17-year-old doing nothing.
Can the wages fund a Roth IRA?
This is the move that turns a tax strategy into a wealth strategy. A child with earned income can contribute to a Roth IRA — up to the amount they earned (within annual limits). That $14,000 of wages could fund a Roth contribution that then grows tax-free for *fifty years*.
Run the thought experiment: $6,000 a year into a Roth from age 16 to 22, then never another dollar, growing at a reasonable rate until age 65 — that's a six-figure head start built from wages the business deducted. You're not just shifting income to a lower bracket. You're seeding your kid's retirement with pre-tax business dollars.
What's the point beyond the tax savings?
Here's the part that doesn't show up on the return: kids who earn money learn what money costs. A teenager who has logged hours, received a paycheck, and watched taxes come out of it understands work in a way no lecture can teach.
Stewardship starts at home. Teaching your kids the value of work — real work, for real pay — is one of the highest-return investments a business-owning parent can make. The tax savings are the bonus.
Your move
List the real tasks your family already does for the business — the photos, the cleanup, the filing, the social media. If that list is non-empty, talk to your tax pro about formalizing family payroll before the next pay period. Every pay cycle you wait is money left on the table.
Not sure your current setup would survive scrutiny — or want to see what else your return is missing? Book a discovery call here.
*This article is for education only and isn't tax advice for your specific situation — talk to a qualified tax professional before setting up family payroll.*