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Pay Your Kids, Cut Your Taxes: The Family-Payroll Strategy the Wealthy Use
- Sabih Shafi E.A
- Jul 15
- 5 min read
You already pay for your kids phones, clothes, activities, and the car you are saving toward. What if some of that money could come out of your business as a deduction and land in your childs hands taxed at almost nothing?
That is not a trick. It is a long-standing planning move: put your children on the payroll for real work, deduct their wages against your business income, and let those wages fall under your childs standard deduction, where they are largely tax-free. The wealthy have done this quietly for years. There is no reason a contractor, dentist, real-estate broker, or e-commerce owner cannot do the same.
I am Sabih Shafi, an Enrolled Agent licensed before the IRS in all 50 states and a QuickBooks ProAdvisor. This is one of my favorite planning strategies because it does three things at once: it lowers your tax bill, it moves money to your family at a near-zero rate, and it can quietly build your child a head start that compounds for decades. Here is how it actually works and how to do it so it holds up.
How the family-payroll strategy works
The mechanics rest on two ordinary, well-established rules:
Wages your business pays are deductible. When your company pays a real employee for real work, that wage is a business expense it reduces your taxable business income.
Your child has their own standard deduction. A single dependent who earns wages gets a standard deduction against earned income. Wages up to that amount generally come in income-tax-free at the federal level.
Put those together and you get a clean shift: a dollar that would have been taxed at your marginal rate moves out of your business as a deduction and onto your childs return, where it is offset by their standard deduction and taxed at little to nothing.
There is a second layer that matters even more for some families. If your business is a sole proprietorship or a partnership owned solely by the parents, wages paid to a child under 18 are generally not subject to Social Security and Medicare tax, and wages to a child under 21 are generally exempt from federal unemployment tax. That payroll-tax exemption does not apply when the business is an S-corp or C-corp which is exactly why we often route the payroll through a family management company. The structure determines the payroll-tax answer, and that is a decision to make with your preparer, not a default.
The numbers (illustrative)
Say you own a Schedule C business and you employ your 16-year-old for genuine work filing, social media, packing orders, basic bookkeeping support.
You pay them roughly the standard-deduction amount across the year call it about $15,000 (illustrative).
Your business deducts that $15,000. At a combined marginal rate near 40%, that is roughly $6,000 in tax saved on your side.
Your childs wages are offset by their standard deduction, so the federal income tax on them is at or near $0.
The dollars did not leave your family they left the IRSs column. Figures are illustrative; your real number depends on your entity, your bracket, a defensible wage, and your childs other income.
The Roth IRA multiplier (this is the real prize)
Here is where it stops being a deduction and becomes generational. Because your child now has earned income, they are eligible to fund a Roth IRA. Contribute some of those wages, and that money grows tax-free for the rest of their life.
Run the compounding: a few thousand dollars contributed during the teenage years, left alone for 40-plus years, can grow into a meaningful six-figure sum all of it tax-free on withdrawal. That is the difference between a tax tactic and a legacy. You are not just trimming this years bill; you are handing your child a decades-long head start that the tax code will never touch again. Growth figures depend on contributions, time, and returns, and are illustrative only.
Where DIY-ers get it wrong and how we do it right
This strategy is powerful precisely because it is real. Treat it as a paper game and it becomes an audit finding. This is where an Enrolled Agent earns the fee:
The work must be real and age-appropriate. A 9-year-old can legitimately model for your marketing; a 9-year-old consultant cannot. The job has to make sense.
The wage must be reasonable what you would pay a stranger for the same work. Inflated pay is the fastest way to lose the deduction.
Document like a real employer. Keep a job description, a timesheet of hours and tasks, and pay through actual payroll not cash from your pocket.
File the payroll paperwork. Your child gets a Form W-2. The wages run through the business books, not around them.
Get the entity structure right. Whether you are a Schedule C, an S-corp, or you need a family management company changes the payroll-tax outcome. We set this up before the first paycheck.
Done correctly, hiring your children is one of the cleanest, most defensible planning moves a family business owner has. Done sloppily, it is a red flag. The documentation is the strategy.
Frequently asked questions
How young can my child be to be on payroll?
There is no hard federal minimum age, but the work has to be genuine and age-appropriate. Younger children can be paid for legitimate roles like modeling in your advertising; the test is whether the work and the pay is real.
How much can I pay them tax-free?
Generally up to your childs standard deduction for earned income, their wages can come in free of federal income tax. The exact figure changes year to year, and the wage must still be reasonable for the work performed.
Do I have to pay payroll taxes on my childs wages?
It depends on your entity. A sole proprietorship or parent-only partnership can generally pay a child under 18 free of Social Security and Medicare tax. An S-corp or C-corp cannot which is often why we use a family management company. We confirm the right structure for your situation.
Can they really fund a Roth IRA?
Yes. Earned wages make your child eligible to contribute to a Roth IRA, up to the lesser of their earnings or the annual limit. That is where the long-term, tax-free compounding comes from.
Run your numbers
Curious what putting your kids on payroll could save you this year and what a Roth started now could grow into? Run your numbers on our free Tax-Savings Calculator, then let us build it correctly: the right entity, a defensible wage, real documentation, and a Roth funded from day one.
Run your numbers or book a free 15-minute planning review.
Sabih Shafi, EA, Founder, All State Tax Resolution. Licensed before the IRS in all 50 states. Intuit QuickBooks ProAdvisor Platinum.
Educational only; not individualized tax advice. Employing your children has specific requirements; figures are illustrative and results depend on your facts. We substantiate every strategy before implementing.
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