How to Hire Your Child as an Employee and Save on Taxes

Hiring your child as an employee can be a strategic move that benefits both your family and your business. Not only does it provide your child with valuable work experience, but it can also offer significant tax advantages. By employing your child, you may be able to reduce your taxable income, as wages paid to your child can be deducted as a business expense. Additionally, if your child is under 18 and works for a sole proprietorship or a partnership owned solely by the child’s parents, their wages may not be subject to Social Security and Medicare taxes. However, it’s crucial to ensure that the employment arrangement is legitimate.

A financial advisor can help determine if hiring your child as an employee makes sense for your personal tax situation and small business needs.

Family Employees and Taxes

Tax regulations offer attractive tax benefits to owners of small businesses who hire their children to work for the family firm. The child’s earnings are also likely to qualify for favorable tax treatment.

As a small business owner, you can pay each child you hire up to $15,000 in 2025 (and $14,600 in 2024) without them owing any federal income tax. That’s because this amount matches the standard deduction for single filers. Your business also gets to deduct your child’s wages as a business expense.

You can’t just hand your kid cash and claim it as a deduction, however. The IRS requires you to follow rules to make the most of this tax play. To properly hire your child and unlock tax savings, keep these guidelines in mind:

• Give them an actual job: Your child must perform necessary work related to your business. Personal tasks like mowing your lawn don’t count.
• Make sure the work suits the child as well: Paying a 16-year-old to sweep out the warehouse is credible, but claiming a kindergartner is keeping the business’s books is not.
• Pay reasonable wages: Compensate your child fairly, as you would any non-relative employee. The IRS may flag excessive pay.
• Follow employment laws: Treat your child like any other employee when it comes to tax withholding, forms filing and more.
• Keep good records: Carefully document hours worked, pay received and taxes paid.
• Consider tax implications: Your child’s pay may or may not be subject to Social Security, Medicare and unemployment taxes based on their age and your business structure.

As long as you closely follow the rules, the IRS lets your business deduct your child’s pay. Your child, meanwhile, can earn up to the standard deduction tax-free.

Hiring Your Child in Action

An example may clarify how this could work in practice. Say you run a small social media consulting business as a sole proprietorship. You decide to hire your 16-year-old daughter to manage your company’s Instagram account for $12 per hour. She works 10 hours per week for 12 weeks during the summer, earning $1,200 total.

You pay her wages and get to deduct the $1,200 on your business tax return. You withhold income tax from her paychecks, but that pay is not subject to Social Security or Medicare taxes since she’s under 18.

At tax time, your daughter files her tax return. If you don’t claim her as a dependent, she can take the standard deduction for single filers. If she is a dependent for tax purposes, she can claim a standard deduction of $1,250 or her earned income plus $400, up to the full standard deduction for single filers. This protects her $1,200 in wages from any federal income tax.

By properly hiring your minor child, you save 7.65% in payroll taxes (Social Security and Medicare). On $1,200, that comes to $91.80. Your child, meanwhile, saves 10% of $1,200, or $120, in federal income taxes. Similarly, the more she earns from working for your business, the greater her tax savings, up to the standard deduction amount.

Before implementing a strategy like this, it can help to estimate the potential tax impact based on your income, filing status and deductions. You can use our income tax calculator to get a quick sense of how shifting income or claiming deductions could affect your overall tax liability:

Restrictions on Hiring a Child

Hiring a child to work in your business can be a beneficial arrangement for both the child and the employer, but it’s crucial to understand the legal restrictions involved. However, hiring your child can be a financial winner, this is not a solution suitable for every taxpayer. If you are considering it, keep these limitations in mind:

• You need self-employment or business income to qualify for the deduction. It won’t work for wage earners.
• Your child must be under age 18 for wages to be exempt from Social Security and Medicare taxes.
• Once your child reaches age 21, you have to pay federal unemployment taxes on their wages.
• The IRS may flag high pay rates for children as unreasonable if they exceed the norm for their duties.
• You and your child must follow all documentation and reporting requirements. Failing to do so could nullify the tax benefits and possibly incur IRS penalties.

The IRS is not likely to give you much leeway if you violate these rules. However, the requirements are not particularly burdensome and tax savings can be substantial if everything is done correctly

Bottom Line

Hiring your child as an employee can be a strategic move that not only benefits your family business but also offers potential tax savings. By employing your child, you can shift income from a higher tax bracket to a lower one, effectively reducing your overall tax liability. This approach is particularly advantageous if your child is under 18, as their earnings are exempt from Social Security and Medicare taxes when working for a parent-owned sole proprietorship or partnership. Additionally, paying your child a reasonable wage for their work allows them to contribute to a Roth IRA, setting the stage for their financial future.

Tax Planning Tips

• If hiring your child seems like something you want to consider, meet with a financial advisor to ensure you fully understand the requirements before moving forward. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• SmartAsset’s Income Tax Calculator gives you a quick and easy way to estimate how much you will owe in federal, state and local taxes.

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