How to Hire Your Kids (The Tax Strategy Most Side Business Owners Miss)

Photo by Vitaly Gariev on Unsplash

If you have a side business—or any self-employment income—you can hire your kids for legitimate work, deduct their wages as a business expense, and if set up correctly, that money can flow from your business to your child’s Roth IRA without ever being taxed. Not reduced taxes. Not deferred taxes. Never taxed.

That “never taxed” result depends on doing real work, paying reasonable wages, running payroll correctly, and funding the Roth within the rules. But when it works, it’s powerful.

Most people either don’t know about this, do it wrong, or miss the Roth IRA opportunity entirely. Let me show you how to do it right.

The problem I see most often: Someone watches a Reel that says you can deduct up to the standard deduction by paying your kid. And that’s all they say. No mention of doing the W-2. No mention of filing the 941. No mention of what to do with the money afterward. They just make it sound like a big pile of cash.

Worse, I’ve seen people paying their kids off the books—no paperwork at all. The child can’t get any of the benefits, the business doesn’t get the deduction, and they’re paying the kid anyway. That’s the worst situation.

Here’s how the money flows when done right.

Your business earns revenue. You pay your child wages for legitimate work—that’s a business expense. If you’re a sole proprietorship or single-member LLC and your child is under 18, there are no FICA taxes on those wages. That exemption is specific to wages paid by a parent’s unincorporated business (not corporations). If your child’s total wages stay under the standard deduction (around the mid-$16,000s in 2026), they’ll typically owe no federal income tax. The child contributes to a Roth IRA. The Roth grows tax-free, withdrawals are tax-free.

A dollar comes into your business, goes all the way through to your child using it in retirement, and is never taxed.

Let me show you the math.

Say you have $10,000 in profit from your side business and you’re in the 22% tax bracket.

If you keep it as profit: self-employment tax is roughly $1,400 (it’s calculated on about 92% of your profit), and income tax at 22% is another $2,200. Total tax: around $3,600. (I’m simplifying here—half the self-employment tax is deductible, so the exact numbers vary, but the direction of the savings is the same.)

Now, same $10,000, but you pay your child for legitimate work (sole prop, child under 18): FICA on the child’s wages is zero. That $10,000 becomes a business expense instead of profit, which can save you thousands in taxes—often a combination of income tax and self-employment tax. The child’s income tax is zero because they’re under the standard deduction. The child puts $7,500 into a Roth IRA (2026 limit). The remaining $2,500? Spending money or a 529.

And that Roth contribution? At 7% growth for 50 years, $7,500 becomes approximately $220,000. Tax-free.

Your business structure matters.

The best case is a sole proprietorship or single-member LLC. For these structures, children under 18 are exempt from Social Security and Medicare taxes—an extra 15.3% you don’t have to pay.

If you have an S-Corp, C-Corp, or a partnership with non-parent partners, you can still hire your kids—you just have to pay the full employment taxes. But you still get the business deduction, the child’s income is still under the standard deduction, and they’re still eligible for the Roth IRA.

The worst case is off the books. No paperwork means no business deduction for you, no Roth eligibility for them, and you’re still paying tax on that money. Get a payroll service, make it formal, and take advantage of these benefits.

The two things that must be reasonable.

The IRS looks at two dimensions: is the task reasonable, and is the pay reasonable?

For the task: could a child of this age actually do this work? Is it real work that benefits the business?

For the pay: would you pay a non-family member this amount for this work? $15-20 an hour for basic tasks is reasonable. $100 an hour for shredding documents is not.

Here’s the test I recommend: if an IRS auditor watched a video of your child doing this task, would they think it’s legitimate work that a child of that age could reasonably perform?

One more thing: if you pay your child exactly the standard deduction—right to the dollar—you’d better have a good justification. If the math lands exactly on that number but the hours and tasks don’t support it, that’s a red flag.

What tasks are reasonable?

Light office work: filing, shredding, organizing supplies, preparing mailings, data entry for older kids. Physical tasks: cleaning your workspace, cleaning your rideshare vehicle, helping with inventory. Creative work: helping with an Etsy business (packaging, labeling), taking product photos, social media assistance for teens.

I started hiring my own kids when they were 5 and 9. Tasks included cleaning the office, filing, shredding, collating—basic light office work. I kept documentation including a photo of my son shredding documents. Their Custodial Roth accounts have grown about 50% from investments since we started.

Here’s how to actually do this.

Step 1: Make sure your child does real work. Identify tasks they can legitimately perform. Keep a simple log of dates, tasks, and hours.

Step 2: Determine reasonable pay. What would you pay someone else? Document your reasoning.

Step 3: Set up payroll. The easiest approach is a service like Gusto or Wave. It costs a little money but handles everything—W-2s, 941s, state requirements. If you prefer doing it yourself, you’ll issue a W-2 at year end and file Form 941 quarterly.

Step 4: File a tax return for your child if needed—and even when it’s not required, it can be a simple way to document the earned income trail. The key is that the wages are real and reported properly (W-2/payroll records).

Step 5: Fund the Roth IRA. Open a Custodial Roth if they don’t have one. Contribute up to the lesser of their earned income or the annual limit ($7,500 in 2026). For amounts beyond the Roth limit, consider a 529.

What to do with the money.

First priority: Custodial Roth IRA. Tax-free growth, tax-free withdrawals, and the earlier you start, the more powerful the compounding.

Second priority: 529 plan. Good for additional amounts beyond the Roth limit.

Third priority: Let them keep some. They see the connection between work and money.

The mistakes to avoid.

Paying with no paperwork. Paying off the books. Paying exactly the standard deduction without justification. Overpaying for the work. Assigning work they can’t actually do. Not documenting. Missing the Roth IRA opportunity—the deduction is great, but the Roth is where the real wealth-building happens.

So where does this leave you?

If you have a side business and kids, think about whether there’s legitimate work they could do. Even a few thousand dollars a year opens the door to the Custodial Roth IRA.

If you’re already paying your kids informally, formalize it. Get a payroll service. Do the W-2. Open the Roth.

The mechanics are manageable—especially with a basic payroll service—and the payoff can be substantial.

This is general education, not tax advice—if your situation is complex (S-Corp, multiple owners, high income), run it by your CPA.