Tax and Family Benefits of Hiring Children in a Family Business

Many family businesses naturally involve multiple generations - from grandparents to teenagers - working side by side. Beyond preparing the next generation for eventual leadership, hiring children and other family members can create meaningful tax and financial benefits. When done correctly, these strategies can reduce the family’s income tax burden, lower payroll taxes, and even fund retirement savings for children. But because these arrangements draw close IRS scrutiny, business owners must be careful to follow the rules.

What Counts as a Reasonable Wage?

A business can hire children of any age, but the wages must be reasonable and tied to actual work performed. The IRS looks closely at compensation paid to family members because these payments can be abused if not managed properly. To protect themselves, business owners should:

• Assign work that is appropriate to the child’s age and abilities.
• Keep documentation such as time sheets.
• File payroll tax returns.
• Pay a wage similar to what a nonfamily employee would earn for the same tasks.

Younger children may be limited to simple jobs like filing, basic cleaning, or office tasks and may work only a few hours per week. Minimum wage is often appropriate. Older children who can take on more advanced responsibilities can earn more - but still must be paid a market rate. Labor laws, both federal and state, also apply. (1)

Key Tax Benefits of Employing a Child

Wages paid to a child are deductible by the business if they are reasonable. The child then pays income tax at their own (usually much lower) rate. In 2025, a child can offset up to $15,000 of earned income with the standard deduction, meaning they can earn that amount tax-free.

Earned income also helps reduce exposure to the kiddie tax, which applies only to unearned income. If a child provides more than half of their own support through earned income, the kiddie tax does not apply.

Example:

A 16-year-old earning $16,000 in 2025 would owe only $100 in income tax. If their parent is in the 32% bracket, the family could save over $5,000 in combined taxes.

Lowering Payroll and Self-Employment Taxes (3)

Children employed by a sole proprietorship or a partnership owned only by the parents receive special payroll tax treatment: 

• Under age 18: exempt from Social Security and Medicare taxes (FICA)
• Under age 21: exempt from federal unemployment tax (FUTA)

These exemptions can produce substantial savings. For business owners subject to self-employment tax, reducing taxable business income by paying a child can also decrease SE tax.

However, these exemptions do not apply to C corporations, S corporations, or partnerships with non-parent partners. In those cases, all payroll taxes must be withheld and paid.

Funding a Child’s IRA (4)

Because IRA contributions require earned income, employing a child opens the door to early retirement savings. In 2025, children can contribute up to $7,000 to a traditional or Roth IRA.

A Roth IRA is often the better choice for kids, who are usually in a very low tax bracket. Contributions grow tax-free and can later be withdrawn penalty-free for qualified education expenses, a first home (up to $10,000), or after age 59½. Starting this early gives the child decades of tax-free growth.

Benefits of Employing Adult Children

Hiring older children brings both financial and succession planning advantages. Having grown children work in the business helps prepare them for future ownership by exposing them to daily operations, employees, and key vendor relationships.

Compensation paid to adult children is deductible, and non-taxable fringe benefits such as health insurance or educational assistance may also be available, depending on the business structure.

Conclusion

When structured properly, employing children in a family business can provide significant benefits: lower income and payroll taxes, opportunities for retirement savings, wealth transfer, and long-term succession planning. The key is ensuring that wages are reasonable, work is legitimate, and documentation is thorough. With these safeguards, hiring children can strengthen both the family and the business for years to come.

Resources

1. IRS Publication 15 (Circular E), Employer’s Tax Guide – Guidance on wages, payroll rules, and employment tax requirements for family employees.
2. IRS Publication 929, Tax Rules for Children and Dependents – Covers kiddie tax, earned income rules, and support tests.
3. IRC §3121(b)(3)(A) – Exemption from FICA for children under age 18 employed by a parent’s sole proprietorship or partnership of parents. IRC §3306(c)(5) – Exemption from FUTA for children under age 21 working for a parent’s business.
4. IRS Publication 590-A and 590-B, Contributions to and Distributions from Individual Retirement Arrangements (IRAs) – Establishes earned income requirements and contribution limits, details penalty exceptions, including education and first-time homebuyer withdrawals. IRC §408A – Governs Roth IRAs, including early withdrawal rules and tax-free distribution requirements.

Disclosures:

Apella Capital, LLC (“Apella”), DBA Apella Wealth, is an investment advisory firm registered with the Securities and Exchange Commission. The firm only transacts business in states where it is properly registered or excluded or exempt from registration requirements. Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. Apella Wealth provides this communication as a matter of general information. Any data or statistics quoted are from sources believed to be reliable but cannot be guaranteed or warranted.

Apella Wealth does not provide tax or legal advice and nothing either stated or implied here should be inferred as providing such advice.