Hiring Your Kids: Family Employment Tax Strategy

The Family Employment Tax Strategy: An Overview

One of the most overlooked yet perfectly legal tax strategies available to business owners is hiring their children. This strategy allows you to reduce your business income through legitimate wage deductions while your children can earn income within the standard deduction limit, effectively moving money from your higher tax bracket to their lower (or zero) tax bracket.

Imagine this scenario: You own a business generating $150,000 in annual profit. By hiring your child to perform legitimate work for $10,000 per year, you reduce your taxable business income to $140,000. In the 32% federal tax bracket, this saves you $3,200 in federal taxes alone. Your child, being under the standard deduction limit, pays virtually no income tax on that $10,000. You've effectively moved $10,000 of income from a 32% tax bracket to a 0% tax bracket.

This is not tax evasion—it's tax planning. The IRS allows this strategy as long as three critical requirements are met: (1) the child must actually work in your business, (2) the work must be legitimate and age-appropriate, and (3) the wages must be reasonable for the work performed.

Understanding Family Employment Tax Strategy

Family employment tax strategy is a legitimate tax planning technique that involves hiring family members, particularly children, to perform actual work in your business or rental properties and deducting their reasonable wages as business expenses. This strategy leverages the progressive tax system and standard deduction rules to reduce your overall family tax liability.

How It Works

Here's the fundamental principle: Business expenses reduce taxable income. When you pay your child a reasonable wage for legitimate work, that payment becomes a business deduction for you and earned income for your child. Because your child likely has little or no other income, their wages fall within or below the standard deduction, resulting in minimal tax liability for them while eliminating the income from your tax return.

For 2024, the standard deduction for a dependent is $1,300 plus earned income up to $13,850. This means a child can earn up to $13,850 per year and owe little to no federal income tax. If they have no income over $13,850, they file no tax return at all.

Who Benefits Most from Family Employment Tax Strategy

This strategy benefits a specific but broad group of taxpayers who meet certain criteria:

• Self-employed business owners - Solo entrepreneurs and small business owners have the most flexibility to hire family members in legitimate capacities.
• Partnership owners - Partners can hire their children with approval of other partners.
• S-Corporation and LLC owners - Owners of these entities can employ family members for actual work performed.
• Real estate investors - Landlords can employ children for property management tasks, maintenance, cleaning, and administrative work.
• High-income earners - Those in higher tax brackets (28%, 32%, 35%, 37%) benefit most because each dollar of deduction saves them more.
• Families with multiple children - The strategy multiplies when you have two, three, or more children who can each earn up to the standard deduction limit.

Not Ideal For:

• W-2 employees - If you work for someone else, you cannot use this strategy.
• C-Corporation owners - While you can still hire your children, you must pay full payroll taxes (15.3%), reducing the benefit.
• Businesses with no legitimate work - If your business cannot offer real work for your children to perform, this strategy won't work.

Best Fit Profile

The ideal candidate for family employment tax strategy is a self-employed or small business owner with:

• A sole proprietorship, partnership, S-Corp, or LLC
• Annual business income exceeding $50,000
• One or more children aged 5-18 (though teens are more typically employed)
• Actual work that needs doing in the business
• Willingness to maintain detailed documentation

Step-by-Step Implementation Guide

Successfully implementing family employment tax strategy requires following specific steps to maximize legitimacy and minimize audit risk.

Step 1: Identify Legitimate Work Opportunities

The foundation of this strategy is identifying real work your child can perform. Common examples include:

• Administrative support: filing, organizing records, data entry, scheduling
• Social media management: posting, responding to comments, content creation
• Marketing assistance: creating graphics, writing copy, newsletter maintenance
• Property management: cleaning rental units, basic maintenance, landscaping
• Customer service: answering phones, responding to emails, managing appointments
• Inventory management: organizing stock, tracking items, taking inventory
• Photography and videography: for business use
• Website development and maintenance

Step 2: Research Market Wage Rates

Document what similar work pays in your market. Check resources like Bureau of Labor Statistics, Glassdoor, or local job listings. Your child's wage must be reasonable for the work performed. As an example, if data entry work pays $15-18/hour in your area and your child does data entry, paying them $12/hour is defensible. Paying them $50/hour for data entry would raise red flags.

Step 3: Create a Written Employment Agreement

Formalize the arrangement with a written agreement. This document should include:

• Job title and specific duties
• Hours of work
• Wage rate (hourly or salary)
• Payment schedule (weekly, bi-weekly, monthly)
• Start and end dates (or ongoing arrangement)
• Signatures of both you and your child

This document serves two critical purposes: it demonstrates to your child that this is a real job (not just getting money), and it provides crucial documentation if the IRS audits your return.

Step 4: Maintain Detailed Time Records

Have your child track hours worked using a simple time log. Include:

• Date of work
• Start and end times
• Specific tasks completed
• Signature of approving manager (you)

For example: "January 15, 2024, 2:00 PM - 4:30 PM (2.5 hours), Organized inventory and updated spreadsheet, approved by Mom."

Step 5: Make Consistent Payments

Pay your child consistently according to the employment agreement. Use one of these payment methods to create a clear paper trail:

• Bank transfer with description
• Check with memo line
• Direct deposit
• Payroll system (even simple online services)

Never pay in cash without documentation. Always create a record showing the date, amount, pay period, and what work it covers.

Step 6: Report on Your Tax Return

Report wages paid to your child as a business expense on:

• Schedule C (Form 1040) if you're a sole proprietor - Report wages in Part II, line 26
• Form 1120 if you're a C-Corporation
• Form 1120-S if you're an S-Corporation
• Form 1065 if you're a partnership

Step 7: File Your Child's Tax Return

Your child must file a tax return if their earned income exceeds $12,550 (for 2024). Even if they don't owe tax, filing is important to:

• Establish a work history
• Generate a paper trail supporting your business deduction
• Potentially recover withheld taxes
• Build Social Security credits

Real Numbers: Examples and Calculations

Let's look at specific scenarios showing potential tax savings with family employment strategy.

Scenario	Business Profit	Children Hired	Wages Paid	Parent Tax Bracket	Parent Tax Savings	Child Tax Owed
One Teen	$100,000	1 (age 16)	$8,000	24%	$1,920	$0
Two Teens	$150,000	2 (ages 15, 17)	$20,000	32%	$6,400	$0
High Earner	$300,000	3 (ages 12, 16, 18)	$30,000	37%	$11,100	$0*
Real Estate Investor	$80,000	1 (age 14)	$6,000	28%	$1,680	$0

*Children earning under $13,850 annually typically owe no tax

Detailed Example: Sarah's Marketing Business

Sarah operates a digital marketing business as a sole proprietor generating $200,000 in annual revenue with $120,000 in profit. She's in the 32% federal tax bracket. Sarah has two teenagers: Jake (16) and Emma (14).

Sarah's Strategy:

• Hire Jake to manage social media, respond to client emails, and create monthly content calendars: $12,000/year
• Hire Emma for administrative tasks: filing, organizing records, scheduling: $8,000/year
• Total wages: $20,000/year

Tax Impact:

• Sarah's taxable business income reduced from $120,000 to $100,000
• Sarah's federal tax savings: $20,000 × 32% = $6,400
• Jake's tax liability: $0 (income under standard deduction)
• Emma's tax liability: $0 (income under standard deduction)
• Total family tax savings: $6,400

Additionally, Jake and Emma each build Social Security credits and demonstrate earned income, which could help them qualify for student loans or other programs later.

Expert Strategies: Maximizing This Opportunity

Beyond the basic implementation, sophisticated business owners use advanced strategies to amplify benefits.

Strategy 1: Combine with Retirement Plans

If your child earns income, they can contribute to an IRA or Solo 401(k) if they have self-employment income. For example, if your child works as an independent contractor instead of as your employee, they can set aside 25% of net self-employment income (up to limits) into a retirement account, further reducing taxable income.

Strategy 2: Multi-Generation Business Model

Create specific roles for each child based on age and ability:

• Younger children (8-12): Simple organizational tasks, light cleaning, basic data entry
• Teens (13-17): More complex work—social media, customer service, accounting assistance
• Young adults (18+): Management roles, significant business responsibilities

Strategy 3: Document Everything Obsessively

Keep meticulous records that demonstrate:

• Employment contract showing terms and conditions
• Time records with dates, hours, and tasks
• Payment records (bank statements, checks, or payroll reports)
• Performance evaluations or notes on quality of work
• Comparison to market rates for similar work
• If possible, photos or evidence of work performed

Strategy 4: Use Reasonable Wage Benchmarking

Don't guess at wage rates. Research exact comparables:

• Check Bureau of Labor Statistics (bls.gov) for your region and industry
• Review Glassdoor or Indeed for similar positions
• Consider your child's experience and skill level
• Document your research and keep it with your business files

Strategy 5: Time Wages to Tax Planning Needs

If your business will have a particularly profitable year, you might accelerate or expand work for family members that year. Conversely, if you anticipate lower income, you might reduce or pause family employment.

Common Mistakes to Avoid

Even well-intentioned business owners make mistakes that invite IRS scrutiny. Here are the most common:

Mistake 1: No Documentation

The #1 reason family employment deductions get disallowed is complete lack of documentation. Without proof that work was actually performed, the IRS assumes it wasn't. Maintain:

• Written employment agreement
• Time records
• Payment records

Mistake 2: Unreasonable Wages

Paying your 12-year-old $50/hour for filing is not reasonable. Neither is paying your 17-year-old $5/hour for administrative work when the market rate is $15/hour. The IRS looks at comparable positions and will disallow deductions for unreasonably high wages.

Mistake 3: No Actual Work Performed

Paying your child money without any actual work is fraud. If you simply transfer money to your child and they return it, or if they're paid for work they don't perform, the IRS will disallow it. Your child must genuinely do the work.

Mistake 4: Using Corporate Structures Incorrectly

If your business is a C-Corporation, you must pay payroll taxes (15.3% combined) on your child's wages. This significantly reduces the benefit. S-Corps and LLCs treated as sole proprietorships don't have this requirement for children under 18 employed in unincorporated businesses.

Mistake 5: Failing to File Your Child's Tax Return

Even though your child likely owes no tax, failing to file their return creates a red flag. File a tax return reporting the income to show you're treating this as a legitimate business transaction.

Mistake 6: Claiming Your Child as Dependent Then Deducting as Employee Only

You can both claim your child as a dependent and deduct their wages as an employee. These are not mutually exclusive. You claim them as a dependent based on the support test; they are your employee based on the work performed.

Mistake 7: No Written Agreement

Even a simple one-page agreement matters. It shows the IRS that you've treated this relationship professionally. Without written terms, the IRS may argue the arrangement is not a genuine employment relationship.

Family Employment vs. Other Tax Strategies

How does family employment compare to other tax-reduction strategies available to business owners?

The Bottom Line: Family employment strategy is one of the simplest, lowest-risk ways to reduce taxes. It requires minimal cost, creates genuine business value (your children learn work ethic and business skills), and is IRS-approved. Consider combining it with other strategies like Solo 401(k)s for maximum effect.

Tools and Resources for Implementation

Several tools can help you properly implement and document family employment strategy.

Frequently Asked Questions

We've compiled the 15 most important questions business owners ask about family employment strategy.