Should I Hire My Child in My Business?

Hiring your child in your business isn’t just a trend. It’s quickly becoming one of the most talked-about strategies among business owners looking to blend family, finance, and future planning.

As a financial planner, I’m frequently asked by clients “Should I hire my child in my business?”. I’ve seen clients use this approach not just to lower their taxable income today, but also to plant seeds of financial literacy, instill a work ethic, and open doors to wealth-building opportunities like funding a custodial Roth IRA. Done correctly, it’s a powerful tool for teaching kids responsibility while legally shifting income within your family. Done incorrectly, however, and you risk IRS scrutiny and penalties.

Let’s break down how this works, what’s allowed, and the tax and planning strategies that make hiring your child a wealth-building tool for the whole family.

Why Hiring Your Child is All the Rage

Parents are increasingly interested in this idea because it checks so many boxes at once:

Tax benefits: You can deduct your child’s wages as a legitimate business expense.
Family wealth transfer: You shift money into your child’s lower (or zero) tax bracket.
Financial literacy: Your kids learn about money, taxes, and saving from real-life experience.
Future planning: It creates the opportunity to fund tax-advantaged accounts like a Roth IRA.

IRS Rules for Hiring Your Child

The IRS allows you to hire your children, but the arrangement must be legitimate employment, not just a paper transaction to shift money.

Here’s what’s required:

Reasonable work for the business. Your child must be doing actual, age-appropriate tasks that directly benefit your business. Examples: filing paperwork, cleaning the office, updating websites, managing social media, organizing inventory, modeling for marketing photos.
Reasonable pay. You must pay them fair market wages for the work performed. If you’d pay a teenager $15 per hour for data entry, that’s your ceiling for your 13-year-old doing the same task. Paying $75 per hour for simple tasks is a red flag.
Documentation. Treat your child like any employee with job descriptions, timesheets, and formal payroll. Pay through checks or direct deposits, never cash handouts. Issue W-2s and maintain all records as you would for other staff.
Taxes and withholdings. Children under 18 working for their parent’s sole proprietorship or partnership (where both partners are parents) are exempt from Social Security and Medicare taxes (FICA). They’re also exempt from FUTA (federal unemployment tax) until age 21. If your business is an S-Corp or C-Corp, payroll taxes apply as normal.

The Tax Benefits

When you pay your child for legitimate work:

The wages are a deductible expense for your business.
Your child reports the wages as earned income—but because of the standard deduction ($15,750 in 2025), they can earn up to that amount tax-free.
You effectively shift income from your high tax bracket to their low (or zero) bracket.

Example:
You’re in the 35% tax bracket. You pay your 15-year-old $12,000 for legitimate work in your business. Your business gets a $12,000 deduction (worth ~$4,200 in tax savings to you). Your child owes no federal income tax because the standard deduction offsets their income.

That’s a win-win.

Custodial Roth IRAs: The Secret Power Play

Here’s where things get exciting. Because your child now has earned income, they’re eligible to contribute to a Roth IRA, even as a minor. You (or they) can contribute up to $7,000 in 2025 (or their total earned income, whichever is less).

Why this is powerful:

Contributions grow tax-free for decades.
Withdrawals in retirement are tax-free.
A $6,000 annual contribution starting at age 15 could grow into well over $1 million by retirement, even at moderate growth rates.

Parents can fund the Roth even if the child spends their paycheck on sports, school activities, or clothes. As long as the child had earned income, the Roth contribution is allowed.

This is one of the most impactful generational wealth strategies available today.

Tying in 529 Plans and Roth IRAs

As of 2024, new rules allow families to roll over unused 529 plan funds into a Roth IRA for the beneficiary, under certain conditions.

Here’s what you need to know:

The 529 plan must have been open for at least 15 years.
The beneficiary must have earned income in the year of the rollover.
Rollovers are subject to the annual Roth IRA contribution limits ($7,000 in 2025).
There’s a lifetime rollover cap of $35,000 per beneficiary.
Contributions (and earnings on contributions) made in the last five years are ineligible for rollover.

This means your child could work for your business, earn wages, and then not only fund a custodial Roth IRA with their income, but also later take advantage of a Roth IRA rollover from any unused 529 funds.

Avoiding Common Pitfalls

State Regulations

Keep in mind that state tax rules may differ. While federal law may exempt your child from Social Security, Medicare, or FUTA taxes in certain circumstances, state income and unemployment tax rules may not match up. Some states impose their own requirements that you’ll need to comply with when hiring your child. Always check your state’s labor and tax laws to ensure you’re in full compliance.

College Financial Aid

Your child’s earned income will appear on financial aid applications and may reduce need-based aid eligibility. Factor this into your planning, especially for families expecting to qualify for significant aid.

IRS Audit Protection

To make sure this strategy passes IRS scrutiny, follow these guidelines:

Legitimize employment: Keep job descriptions, timesheets, and pay stubs.
Pay reasonable wages: Align with market rates for the work.
Run payroll: Even if exempt from FICA, set up a payroll system to track pay and issue W-2s.
Report income: File the necessary forms for your business and your child.
Keep personal use separate: Your child should not be paid for personal chores (like mowing your lawn unless your business is a landscaping company).

Remember, the IRS has little tolerance for arrangements that look like tax shelters. The more legitimate and well-documented, the better.

Age-Appropriate Implementation

Elementary Age (6-10)

Simple tasks like organizing supplies, basic filing, or appearing in marketing photos. Keep hours minimal and compensation modest.

Middle School (11-14)

Data entry, social media posting, inventory management, or customer service support. Can handle more responsibility and longer hours.

High School (15-18)

Website management, bookkeeping assistance, sales support, or project management. Full part-time capability with professional-level contributions.

The Implementation Checklist

Before Starting:

Define specific job roles and responsibilities
Research market wages for similar work
Set up proper payroll systems
Understand your state’s requirements
Consult with a tax professional

During Employment:

Maintain detailed timesheets and work logs
Process payroll consistently and professionally
Issue proper tax documents
Monitor performance and adjust responsibilities
Document all business-related activities

Year-End Actions:

Issue W-2 forms properly
Consider Roth IRA contributions
Review strategy effectiveness
Plan for the following year’s opportunities

Beyond the Numbers: Life Skills Development

The financial benefits are compelling, but the personal development aspects may prove even more valuable:

Work ethic: Children experience the responsibility of earning and being paid.
Financial literacy: They learn about taxes, saving, investing, and compounding.
Ownership mindset: They see firsthand how family businesses operate.
Confidence and skills: They gain resume-worthy experience.

Professional Guidance is Essential

This strategy involves complex interactions between business law, tax regulations, payroll compliance, and financial planning. Every family’s situation is unique, and mistakes can be costly.

Work with qualified professionals including CPAs familiar with family business taxation and financial planners experienced in multigenerational wealth strategies. The upfront investment in proper guidance pays dividends in both compliance and optimization.

The Long-Term Vision

Hiring your child isn’t just about this year’s tax savings. It’s about launching a lifetime of financial advantage. A teenager who starts contributing to a Roth IRA through legitimate employment could retire as a millionaire from those early contributions alone.

More importantly, you’re raising a financially literate adult who understands the value of work, the power of investing, and the importance of proper planning. In a world where financial education is often lacking, you’re giving your child real-world experience that will serve them for life.