Key Takeaways
- Pay family members fairly for real, documented work; the deduction is legitimate exactly as far as the work is.
- Wages to your under-18 child from a parent's sole proprietorship or family partnership can escape payroll taxes and land nearly tax-free.
- Earned income makes a child Roth-eligible: a few summers of wages compounding for fifty years is the quiet jackpot.
Employing family is one of the few tax strategies that is simultaneously legitimate, wholesome, and compounding: the business deducts wages at the owner's high rate, the family member recognizes them at a low or zero rate, and the child's earned income unlocks a Roth IRA with a half-century runway. It works precisely to the extent it is real, real work, market wages, actual records, and it fails, expensively, as fiction.
The Child Payroll Rules
Wages paid to your under-18 child by a parent's sole proprietorship or a partnership owned solely by the parents are exempt from Social Security and Medicare taxes (and FUTA to 21); S-corps and other entities owe payroll taxes on family wages, though a family management company structure is sometimes used to restore the benefit, that is CPA territory. The child's standard deduction (over $15,000 now) means a reasonable summer-and-weekend wage typically generates zero income tax. Requirements: age-appropriate real work (content, filing, cleaning, modeling for ads, actual tasks the business would otherwise pay for), a defensible market wage, timesheets, and payment into the child's own account. Details live in IRS Publication 15 at irs.gov.
The Roth Multiplier
Earned income is the key that opens a custodial Roth IRA: contributions up to the lesser of wages or the annual IRA limit, growing tax-free for what could be five or six decades. A teenager earning $7,500 across three summers, contributed to a Roth and invested in broad index funds, is plausibly a six-figure retirement head start, and the contributions (not earnings) remain accessible for a first home or emergencies. Parents can gift the child spending money so the wages themselves flow to the Roth; the tax code only requires that earned income existed, not that those exact dollars were contributed.
Try it: the free Net Worth Calculator takes a couple of minutes and shows you where you stand. Or explore For Business Owners at Attend.
The Spouse on Payroll
A spouse doing real work changes different math: their wages create retirement plan space, potentially doubling the household's 401(k) shelter, qualify them for Social Security credits, and can enable travel and benefit arrangements to be cleanly deductible. The costs: payroll taxes on their wages (no under-18 exemption) and added compliance. The net is positive mainly when the retirement space would otherwise go unused, run it as arithmetic, not folklore.
Doing It Audit-proof
Treat family exactly like staff: written job descriptions, timesheets, market-rate pay runs through actual payroll with W-2s, separate bank accounts, and work you could describe to an examiner with a straight face. What draws trouble: $12,000 to a toddler for "modeling," wages that spike at year-end, and payments that boomerang to the parents' account. Kept honest, this strategy stacks with the rest of the owner deduction stack and doubles as the best financial education your kids will get, a paycheck with their name on it.
Frequently Asked Questions
How much can I pay my 14-year-old?
Whatever the work is worth on the open market, documented. The sweet spot for tax purposes is up to the standard deduction, where federal income tax is zero, but the wage must be justified by the work, not the target.
Do I need to file payroll forms for my child?
Yes, real payroll: W-2, withholding filings even when tax is zero, and state registrations as applicable. The exemptions remove certain taxes, not the paperwork.
Can grandparents' businesses use the payroll-tax exemption?
No, the FICA exemption is for parents employing their children. A grandchild on grandparent payroll is a legitimate employee but with normal payroll taxes.
Tony leads Attend Wealth, a fee-based wealth management firm in Atlanta serving professionals, families, and business owners. Advisory services are held to a fiduciary standard. More about Attend
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