Hire Your Kids in 2025: A Powerful Tax Strategy for Business Owners

If you own your own business and have children, there’s a legitimate and often overlooked tax strategy that can help you lower your taxable income, teach your kids the value of hard work, and even set them up for long-term wealth — all at the same time.

The strategy? Put your children on payroll.

It’s not a loophole — it’s a completely legal and IRS-approved strategy when done correctly. The idea is simple: if your children do legitimate work for your business, you can pay them a reasonable wage. Your business deducts the wages just like any other employee’s pay, and your child pays little to no income tax on that income. Everyone wins — except the IRS.

How the Tax Savings Work in 2025

For 2025, the standard deduction for a single filer — including dependent children — is $14,900. This means your child can earn up to $14,900 in wages from your business and pay zero federal income tax. Meanwhile, your business gets a full deduction for the wages paid.

To put this into perspective, if you’re in a 35% tax bracket and pay your child $14,900 for work they legitimately perform, you reduce your taxable income by that amount — saving over $5,200 in federal taxes alone. That doesn’t include the additional benefits of retirement contributions or savings on self-employment taxes if you operate as a sole proprietor or partnership.

What Kind of Work Can They Do?

The key to making this strategy audit-proof is treating your child like a real employee — because they are. That means they must perform actual work that adds value to the business and be paid a reasonable wage for that work.

The specific tasks will vary depending on your business and your child’s age, but examples include things like filing documents, shredding papers, stuffing envelopes, organizing inventory, cleaning the office, managing social media posts, editing videos, assisting with online listings, or modeling in marketing photos. The younger the child, the simpler the work should be. For example, a 9-year-old helping with filing or shredding documents could make sense. A 14-year-old creating Instagram content or helping with client prep work is fair game.

What matters most is documentation: job descriptions, time logs, and reasonable compensation. The IRS has no issue with parents hiring their children — as long as it’s a real job at a real business with real records.

How This Strategy Works with an S-Corporation

If you operate your business as a sole proprietorship or a partnership where both spouses are the only partners, the rules are especially favorable: wages paid to your child under age 18 are not subject to Social Security, Medicare, or FUTA (unemployment) taxes. But with an S-Corporation, the rules are different.

S-Corps must treat all employees equally for payroll tax purposes — including your children. That means you'll need to set them up through your regular payroll system, with appropriate federal and state withholdings, and pay the employer portion of payroll taxes.

While this reduces some of the savings, the strategy is still very worthwhile. Here’s why:

Let’s say your S-Corporation pays your 15-year-old $12,000 during the year. You still get to deduct the full $12,000 from your business income, reducing your corporate tax burden. Your child will have federal income tax withheld, but because their total income is below the standard deduction threshold, they’ll receive a full refund when they file their return. While FICA (Social Security and Medicare) taxes will be owed, the savings from the federal income tax deduction alone usually outweigh the payroll tax cost — especially when compared to what you'd pay in taxes to keep that income personally.

Additionally, by having earned income, your child becomes eligible to contribute to a Roth IRA — one of the most powerful long-term wealth-building tools available. In 2025, they can contribute up to $7,000 or their total earned income, whichever is less. Imagine the impact of contributing to a Roth IRA at age 14 and letting that grow for 40+ years — completely tax-free.

A Real-World Example

Let’s say you run a marketing agency as an S-Corporation, and you hire your 13-year-old to assist with content planning and video editing for your company’s social media accounts. You pay them $10,000 over the course of the year.

You run this through payroll like any other employee, issue a W-2 at year-end, and pay employer payroll taxes (roughly 7.65%). Your child has income under the $14,900 standard deduction, so they owe no federal income tax, and they get back anything that was withheld. You reduce your business’s taxable income by $10,000, saving thousands in taxes. You also take some of that income and contribute $5,000 to a Roth IRA, setting your child up with a powerful tax-free retirement account.

All in all, your business saves money, your child gains experience, and you keep more of your wealth in the family — not in the government’s hands.

Compliance Is Key

For this strategy to hold up under scrutiny, you must treat it like any other employer-employee relationship. That means:

• Maintain a job description and work logs

• Pay through a business checking account (never in cash)

• Issue a W-2 and file all necessary payroll tax forms

• Pay a reasonable wage based on the work performed

This isn’t about giving your child an allowance disguised as a paycheck. It’s about creating a real employment opportunity — and reaping the tax benefits that come with it.

Let’s Talk Strategy

At Shifflett & Philips, we help business owners take full advantage of tax strategies like this — but only when it’s done the right way. If you're interested in setting this up properly for 2025, we can guide you through payroll setup, wage documentation, and even retirement planning for your kids.

Get in touch with us today to explore how hiring your kids could reduce your taxes and help build generational wealth.