If your children do real work for your business at a reasonable wage, the wages are a deductible business expense to you, and your child can earn up to the standard deduction, over fifteen thousand dollars adjusted annually, with zero federal income tax. If your business is a sole proprietorship or a partnership owned only by the parents, wages paid to your child under 18 are also exempt from Social Security and Medicare taxes. Same family, same money, a fraction of the tax.
Walt owns a landscaping company, and his 16-year-old daughter Priya is better at Instagram than anyone he could hire off a job board. So he hires her. Real job: she shoots before-and-after photos, posts three times a week, answers comments, and tracks which posts bring calls. Real wage: $18 an hour, about what a local social media freelancer charges. Real records: timesheets, a written job description, and paychecks from the business account into her account.
She earns $14,000 for the year, and here is what the code does with it.
The money never left the family. The tax did.
The rules in plain English
- Real work the business genuinely needs: filing, photography, social media, cleaning, inventory. Age-appropriate, and documented.
- A reasonable wage: what you would pay a stranger for the same work, not a number reverse-engineered from a tax goal.
- Real payroll: timesheets, a written job description, pay into the child's own account, and a W-2 at year end even when payroll taxes do not apply.
- The under-18 payroll-tax exemption belongs to sole proprietorships and partnerships owned solely by the parents. S corps and C corps still get the wage deduction, but payroll taxes apply; some owners use a family management company structure, which is a conversation for your CPA, not a template.
- One fear you can retire: the kiddie tax applies to a child's investment income, not to wages. A paycheck for real work is taxed like anyone's paycheck, which for most kids means not at all.
Unreasonable wages or missing timesheets turn the deduction into a disallowance with penalties attached. Corporations still owe payroll taxes on the kids' wages. And pay that lands in your account instead of the child's makes the whole arrangement look like fiction, because at that point it is. The strategy is real; the payroll file is the price.
The mistakes that get people in trouble
- Paying a seven-year-old $30,000 to "model" for one photo. Reasonable or nothing.
- No timesheets, no job description, wages in cash with no trail.
- Wages deposited back into the parent's account.
- Inventing work the business does not need. The job comes first; the deduction follows it.
Where the paycheck goes next
Here is the part that turns a good strategy into a great one. Priya's wages are earned income, and earned income is the ticket into a Roth IRA. A teenager's Roth has four decades of compounding in front of it, funded with income that was barely taxed going in and never taxed coming out. That move gets its own page, because it deserves one: The Teenager's Roth.
Questions owners actually ask
A family that reads the code keeps more of what it earns, and the biggest reading assignment is the building the business runs from: most owners sit on $200,000 to $450,000 per million in unclaimed deductions. You found the money in a paycheck. Now send the engineers into the building your business sits in.
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