How much can you pay your child tax free?
As a business owner, you're constantly searching for ways to reduce your tax bill so you can use that money to build wealth for your family.
One of the best ways to do that is by hiring your children.
Hiring your children isn't just about giving them spending money or teaching them responsibility.
When done properly, it creates a triple advantage: your business receives a tax deduction for wages paid, your child pays little to no income tax on their earnings, and you're transferring wealth from your estate while avoiding gift taxes.
What are the Tax Advantages of Hiring my Children?
The standard deduction for a single taxpayer is $15,750 in 2025. This means your child can earn up to $15,750 in wages from your business and pay zero federal income tax, regardless of whether you itemize or take the standard deduction.
For example, if you hire three of your children and pay them each $15,750, they owe no federal tax and you could save thousands by deducting those wages on your Schedule C, lowering both your income and self-employment taxes.
If you’re a sole proprietor or operate a spouse-only partnership, the benefits are better. Wages paid to your children under age 18 are exempt from Social Security and Medicare (FICA) taxes, and those under age 21 are exempt from federal unemployment tax (FUTA). So, you can deduct their wages and avoid employment tax costs entirely. This saves you over 15% on those wages compared to hiring an unrelated employee.
For a child earning $15,000 annually, that equates to about $2,000 saved in payroll taxes.
If you operate as an S-corp or C-corp (where payroll taxes do apply), the strategy can still work since you do receive a deduction for them, and your children still owe no income tax on their wages. In one example, a family netted $9,663 in government-paid tax savings after accounting for taxes paid and deductions received.
The income your child earns also opens doors to retirement savings opportunities. Most adults say they wish they started saving and investing sooner – employing your child gives them that ‘early access’ opportunity, since a working child can contribute to a Roth IRA.
Imagine your 14 year old contributes $6,000 annually to a Roth IRA for five years. Assuming a 7% average annual return, even if they never contribute again, their investments could grow to over $440,000 by the time they’re 65.
Do I have to give my child a W-2?
The IRS tends to keep a closer watch on family employment. Why?
Too many business owners have abused the rules and paid their kids for work they never performed, or at unrealistic rates.
This means you should keep accurate documents, like time records showing when your child worked and what tasks they did. You also need to pay them a realistic amount, comparable to what you'd pay a non-family member for similar work. For extra caution, have a written job description, evidence of work, and proper payroll processing including W-2 forms at the end of the year.
The work must also be legitimate and age appropriate. Paying your seven year old $50,000 annually to be your "vice president of strategy" would raise red flags. However, paying that same seven year old $3,000 to be in advertising materials for your children's clothing boutique could be legitimate, especially if properly documented with the ad to show their participation.
How does this affect my Multi-Generational Financial Planning?
Once your child earns income, they can make tax-deductible contributions to traditional IRAs or tax-free Roth IRA contributions, as mentioned earlier.
Some families take this further by having the child use their earnings to pay for legitimate business expenses that benefit them, such as computers for business use or professional development courses.
Another strategy is having your child save their earnings to eventually purchase income-producing assets or invest in the family business itself.
This creates a shift in wealth from the older generation to the younger while also teaching financial literacy. Over time, the child builds their own asset base, potentially removing significant wealth from your taxable estate.
What is the Kiddie Tax?
The "kiddie tax" rules add a layer of complexity.
For children under 19 or full-time students under 24, unearned income above a certain threshold is taxed at the parents' marginal tax rate rather than the child's lower rate.
For 2025 the first $1,350 of unearned income is tax free, the next $1,350 is taxed at the child’s rate, and any amount beyond $2,700 is taxed at the parents’ rate.
The important distinction is earned versus unearned income.
Employment wages are considered earned income and aren't subject to the kiddie tax. However, if your child uses their wages to buy investments that generate dividends, interest, or capital gains, those are unearned earnings and could be subject to the kiddie tax.
Does my business structure affect hiring my kids?
Yes, your business entity type affects how this strategy works.
Sole Proprietorship: You gain maximum flexibility and payroll tax exemptions.
Partnership (where you and your spouse are the only partners): you get similar benefits.
Corporation: You lose the payroll tax exemptions but still have the income tax benefits.
Some business owners consider restructuring their entities to optimize family employment benefits, but that requires you to weigh factors like liability protection, overall tax strategy, future sale plans, and administrative complexity.
How do labor laws affect this?
In most states, child labor laws restrict the hours and types of work children can perform, particularly for those under 16. You'll also need to ensure your employment practices comply with federal Fair Labor Standards Act requirements and your state's specific regulations.
What are the child labor laws in California?
Below is a summary chart of California’s child labor laws. This chart is from https://www.dir.ca.gov/dlse/dlse-cl.htm where you can find more information.
What are the child labor laws in Idaho?
In general, children can work in Idaho in non-agricultural jobs once they turn 14.
Children ages 14-15 can work a maximum of 18 hours per week. Those between 16-17 can work more, but no longer than 8 hours per day.
For more details on Idaho laws, refer to: https://business.idaho.gov/employer-issues/teen-employees/?sbdcrw=6c32dc65d44f579c07231b258d687e63#:~:text=Age%20Restrictions%3A%20According%20to%20the,school%20boards%20and%20truant%20officers
Hiring your children is one of the most tax-efficient wealth transfer strategies for business owners. When implemented correctly it reduces your current tax burden, provides your children with earned income for retirement contributions and financial education, and shifts wealth to the next generation outside the gift and estate tax system.
But, it requires you to understand tax law, employment law, retirement account regulations, estate planning, and your business structure. Mistakes can trigger penalties, back taxes, or even criminal charges in extreme cases.
As always, we recommend working with a professional who understands both tax strategies and wealth management.
Author: Rob Cucchiaro, CFP, CRPC, AAMS
Questions answered in this blog:
How much can you pay your child tax free?
What are the benefits of hiring my children?
What are the tax advantages of hiring my children?
Do I have to give my child a W-2?
How does this affect my multi-generational financial planning?
What is the kiddie tax?
What amount of my child’s income is tax free?
What amount of my child’s income is taxed?
What amount of my child’s income is taxed at my tax rate?
What counts as earned income?
What counts as unearned income?
Does my business structure affect hiring my kids?
What are the child labor laws in California?
What are the child labor laws in Idaho?
This material is purely intended to be general and educational in nature, and should not be construed as specifically-tailored investment, financial planning, tax, legal, or other professional advice. Information and data contained herein is as-of the date of publication, and may be subject to change in the future without notice. Any investment performance referenced is purely past performance, which is no guarantee of any future performance. Nothing contained herein should be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation of any security or other financial product or investment strategy. All investment, tax, and financial planning strategies involve risk that you should be prepared to bear. You are highly encouraged to consult with professionals of your choosing before taking any action based on this material.