How to Legally Pay Your Kids Through Your Business: Tax Benefits, IRS Requirements, and Documentation Tips
Paying your kids through your business isn’t just a great way to teach them valuable life skills—it’s also a smart tax strategy! It’s actually one of the top strategies we help business owners implement.
Most business owners pay taxes at their tax rate and then give their kids money for things like clothes, school, sports, tuition and extracurricular activities. You don’t get any write-offs when you do this.
So why pay taxes and give kids money when you can start paying them through the business tax-free? Then, they can use that money to pay for their expenses and/or save.
By hiring your children to perform real tasks, you can reduce your taxable income, build their savings and keep more money within your family. But to do it the right way, you need to follow the IRS rules closely.
In this blog, we’ll explain how you can pay your kids through your business, the documentation you’ll need, and how much you can pay them tax-free. Plus, we’ll look at an example where a business owner successfully passed an IRS audit.
Why Pay Your Kids Through Your Business?
Earned Income: When your kids work in your business and get paid, they earn income. This income is theirs to save, spend, or invest. It teaches them the importance of managing money early on.
Tax Savings: The IRS allows you to pay your kids without having to pay taxes on it—up to a certain amount each year. This means the money you pay them is tax-free for both your business and your child, as long as it’s within the IRS guidelines. For 2024, that amount is $14,600. This is the amount they can earn tax-free.
Business Expense: The money you pay your kids for their work is a deductible business expense. That means it lowers your business's taxable income!
What Kind of Jobs Can Kids Do?
It’s important that your children actually do real work for the money they earn. Here are some simple tasks your kids could do in a business:
Filing and organizing: They can help organize files, sort paperwork, or tidy up the office.
Social media assistance: If your child is a bit older, they can help with basic social media tasks, like scheduling posts or editing videos.
Cleaning: Keeping the office clean, like wiping down surfaces or sweeping, is a great way to teach responsibility.
Research: They can assist in researching simple tasks, like finding new ideas for social media content.
Helping with events: If your business hosts events, your kids could help with setup, cleanup, or handing out flyers.
Data entry: Depending on their age, they could help enter data into spreadsheets.
How Much Can You Pay Your Kid?
For 2024, the IRS allows each child to earn up to $14,600 tax-free, even if they’re a dependent on your tax return. This means you can pay your child this amount, and they won't owe any federal income tax on it.
Think of this as your child’s standard deduction. Just like you don’t pay taxes on your standard deduction, neither do they.
It’s also important to note:
Children may still have to pay state taxes depending on what state you’re in.
The Kiddie Tax doesn’t apply in this situation because Kiddie Tax applies on unearned income or passive income. We are talking about paying kids for earned income.
Entity Structures That Can Pay Kids Tax-Free
The tax advantage of paying kids tax-free is only available for:
Sole proprietorships
Partnerships with both parents as partners
LLCs taxed in those ways
Corporations don’t have this same benefit, but hiring your children can still be a valid tax strategy as wages are deductible.
If you have an S Corporation and want to take advantage of this strategy, consider working with your tax advisor and business attorney to set up a Family Management Company to pay the kids.
Should I 1099 My Kids?
Do not 1099 your kids if they’re under age 18. If you 1099 them, they would be responsible for paying self-employment taxes.
What Documentation Do You Need?
Here is the documentation needed to implement the tax strategy of paying your kids.
Job Description: Just like any employee, your child needs a clear job description. You should outline the tasks they will be responsible for and ensure they are age-appropriate. For example, a 7-year-old might help with cleaning or organizing, while a 16-year-old could assist with data entry or social media management.
Time Sheets: You must document the hours your child works. Keep track of the days they work, the number of hours worked, and what tasks they performed. This serves as proof that they are doing real work for the business.
Reasonable Wages: The IRS requires that you pay your child a reasonable wage for the work they do. This means you should pay them what you would pay a non-family employee to do the same task. For example, if you would pay someone $10 per hour to help with filing, that’s what you should pay your child.
Payment: You will want to have custodial accounts set up for your kids, and you will send their payment directly to their custodial account. You’ll want to pay them just as you would any other employee, either weekly, bi-weekly or monthly.
Work Agreement: It can also be helpful to create a simple work agreement between your business and your child. This outlines their duties, pay, and work expectations. While this is not required, it shows you are treating them like a real employee.
IRS Requirements for Hiring Your Children
To pass an IRS audit, you need to prove that:
The work is necessary and legitimate: The work your child does must be something that is needed by the business, not just “busy work” created to pay them. For example, they could help with filing, customer service, or cleaning, but simply sitting at a desk wouldn’t count.
The work is age-appropriate: A 5-year-old cannot reasonably handle complex tasks like accounting or legal work. The tasks must fit the child's age and ability.
The child is paid fairly: You cannot overpay your child for simple tasks. For example, paying a child $50 an hour to sweep the floors is excessive. The wage must match the task.
Paying your Kids: Business Owner Example
Let’s consider a hypothetical example. Imagine a small marketing firm where the owner hires their 14-year-old son to help with clerical tasks such as filing, scanning documents, organizing client paperwork, and cleaning the office. The owner:
Kept detailed time sheets showing the hours worked by the child each week.
Created a job description outlining specific tasks the child was responsible for.
Paid the child a reasonable wage of $12 per hour, which is in line with what they would pay a part-time assistant.
Properly documented payroll payments.
If the IRS audited this business, the owner could provide clear evidence of work performed, pay, and documentation. As long as all the requirements were met, the deduction for wages paid to the child would be allowed, and the owner would not face penalties.
Henry v. Commissioner: The IRS Questions Wages to Kids in Audit
In the case of Henry v. Commissioner, a couple owned a construction business and employed their teenage sons to work on job sites and perform clerical work. The IRS audited their tax return and questioned the deduction for the wages paid to their children, which was approximately $7,000 each over the tax years in question. The parents were able to show:
Work Performed: The children did actual work, including cleaning the job sites, moving equipment, and filing paperwork.
Documentation: They had time sheets, payroll records, and even photos of the children working at the job sites.
Reasonable Wages: They paid their children a reasonable wage based on the tasks performed and the local labor market rates.
Because the parents had good records and could show the children performed real, necessary work for the business, the IRS allowed the deduction. They did not face penalties because they had met all the requirements.
Important Tips:
Make sure the work your kids are doing is appropriate for their age and skills.
Keep records of their hours worked and the tasks they perform.
Pay them a reasonable wage for the work they do. You can't pay them $100 for sweeping the floor!
Hiring your children is a smart way to teach them the value of work and money while benefiting from tax savings. They learn responsibility, and you get to save some money on taxes. Just remember to keep good records and pay them for real tasks.
At Blend Wealth, we're here to help you navigate these strategies to make the most of your business. We can help ensure you meet all requirements, maximize your benefits and stay updated on IRS regulations that are continuously changing.
We help clients implement tax strategies like this by meeting regularly throughout the year. If you’re interested in partnering with one of our tax advisors to implement tax strategies like paying your kids, schedule a Right Fit Call here.
