How Hiring Your Kids Could Cut the Family Tax Bill

Summary

A business owner could potentially turn money already spent on their children into a legitimate tax deduction—but only if the work, pay, entity, and paperwork all withstand scrutiny. The strategy involves hiring a child for genuine, age-appropriate business services and paying reasonable market wages into the child’s own account. The business deducts the compensation, while the child may use a claimed $16,100 standard deduction to shelter earned income from federal income tax. For children under age 18, wages paid by a parent’s sole proprietorship or a partnership owned by both parents may also qualify for exemptions from Social Security and Medicare taxes. That exemption generally does not apply when children are paid directly by an S corporation or C corporation. The speaker proposes a separate family management sole proprietorship for legitimate support services, but such structuring requires careful professional guidance. Examples include paying a 9-year-old $6,000 for basic office tasks or a 15-year-old $15,000 for social media, bookkeeping, or customer service. At a 30% combined tax rate, a $15,000 deduction could save the parent $4,500. Older children may instead receive W-2 wages or 1099 contractor income depending on their actual working relationship, potentially creating self-employment tax and financial-aid consequences. Key safeguards are real work, reasonable compensation, time records, job descriptions, actual bank transfers, correct worker classification, and compliance with federal and state labor laws.