Paying Children and Grandkids

Hiring your children or grandchildren in your business can provide meaningful tax benefits while teaching financial responsibility and work ethic. When done correctly, it's a legitimate income-shifting strategy.

Tax Benefits

Income earned by children is typically taxed at their lower rates—often 0% or 10%. The first $14,600 of earned income (2024 standard deduction) is tax-free. Parents get a business deduction for wages paid, while children can fund Roth IRAs with earned income.

Special Rules for Sole Proprietorships

Children under 18 employed by a parent's sole proprietorship are exempt from Social Security and Medicare taxes (FICA). Children under 21 are exempt from federal unemployment tax (FUTA). These exemptions make family employment particularly attractive for sole proprietors.

Requirements for Deductibility

The child must perform legitimate services appropriate for their age. Compensation must be reasonable for the work performed. You must maintain proper employment records, including time sheets and task documentation.

Appropriate Work Examples

Depending on age, children can perform filing and organizing, cleaning office spaces, shredding documents, assembling materials, basic computer work, social media assistance, modeling for marketing (with proper permits), and office errands.

Documentation Best Practices

Create a written job description. Maintain time records signed by the child. Pay by check or direct deposit (not cash). File W-2s and required payroll returns. Keep records of tasks completed.

Building Wealth

Consider having children contribute earnings to Roth IRAs. A teenager who earns $6,000 annually and contributes to a Roth could have over $100,000 tax-free by age 65 from just a few years of contributions—a powerful wealth-building lesson.