This is one of those strategies that sounds too good to be true until you understand why it's legal and how to do it right. You can employ your children in your business, pay them reasonable wages, deduct those wages as a business expense, and (for younger children) have them pay little to no income tax on that money. That's a legitimate tax planning strategy, not a loophole.
How It Works
If your business is a sole proprietorship or a partnership where both partners are the child's parents, wages paid to children under 18 are exempt from Social Security and Medicare taxes. That's a 15.3% savings on top of the deduction. Your child reports the income on their own return and pays tax at their rate, which is much lower than yours if they have no other income.
The standard deduction for a dependent child in 2024 is $1,300. Beyond that, the first $11,600 (the single filer standard deduction) is taxed at 0% or 10%. Compare that to your marginal rate. The savings are real.
The Rules That Actually Matter
The work has to be real work. You can't pay your 10-year-old $30,000 for "administrative support" and expect that to survive scrutiny. The work should be appropriate to their age and genuinely performed. Answering the phone, filing, cleaning the shop, social media posts, helping with inventory, running errands. Document what they do.
The pay has to be reasonable. What would you pay a non-related person to do the same work? That's your ceiling. Paying your 14-year-old $15/hour to answer calls and file paperwork is reasonable. Paying them $50/hour for the same work is not.
Keep records. Time sheets. A real payroll process. Direct deposit to their account. The IRS can ask for documentation. Have it.
The S-Corp Wrinkle
If your business is an S-Corp or a C-Corp, the FICA exemption for children under 18 doesn't apply. You'll owe payroll taxes on their wages just like any employee. The deduction still works, and the income-shifting benefit is still real if their rate is lower than yours, but the math is slightly different. Check with your accountant on the corporate structure version.
Used correctly, this strategy can put several thousand dollars in your child's name each year while reducing your taxable business income by the same amount. That's money that could fund a Roth IRA for them. The long-term compounding on that is extraordinary.
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Written by
Dina Good
Founder, WerkOps
Dina grew up in the trades. Her father was a contractor, then a building inspector, and the job site was her classroom long before any formal one was. She went on to own her own contracting company, which is where she first felt the pain of running a skilled trade business on bad software and worse spreadsheets. A love of data pulled her into programming, and the two worlds eventually collided into WerkOps - software built by someone who has actually been on the truck.