If you own a sole proprietorship or a single-member LLC taxed as a sole proprietorship, hiring your child can be a smart way to reduce your taxes and a powerful financial gift for their future.
When you hire your child to perform legitimate work for your business:
- Their wages are deductible on your Schedule C.
- If they are under 18, you are not required to withhold Social Security and Medicare taxes (FICA).
- If they are under 21, you also avoid FUTA taxes.
This reduces your taxable income and self-employment tax, lowering your overall family tax bill.
⚠️ Once your child turns 21, wages become subject to both FICA and FUTA, just like any other employee.
Although FICA and FUTA taxes are generally not required when hiring your under-18 child into your Schedule C business, income tax withholding still applies unless your child claims “Exempt” on their W-4.
Work with your tax professional to ensure proper forms are filed and no unnecessary withholding occurs.
What Qualifies as Legitimate Work?
When hiring a child in a business, it’s important that the work performed is legitimate, meaning the child is engaged in actual, age-appropriate tasks that provide a genuine benefit to the business. The duties should be necessary for business operations and similar to what you would assign to any other employee in that role. Compensation must be reasonable for the work performed, and business records should document hours worked and tasks completed.
What About the Kiddie Tax?
You may have heard of the Kiddie Tax, which applies to a child’s unearned income (like dividends and interest). However, if your child works for your business and you pay them reasonable wages for actual work performed and if those wages are their only income, the Kiddie Tax rules do not apply. Your child will simply file their own tax return and benefit from the standard deduction ($14,600 for single filers in 2025).
⚠️ If your child later invests the wages they earned (for example, by putting them into a brokerage account), the investment earnings could be subject to Kiddie Tax — but their wages themselves are not.
Because wages count as earned income, your child becomes eligible to contribute to a Roth IRA , one of the best long-term wealth-building tools available:
- In 2025, they can contribute up to $7,000 (or their earned income, whichever is less).
- Contributions grow tax-free, and qualified withdrawals in retirement are also tax-free.
Roth IRAs have no minimum age. You can open the Roth IRA in your child’s name, with you as the custodian if they are under 18. Funding a Roth IRA is not subject to the Kiddie Tax, and growth inside the Roth IRA is not taxed annually, so Kiddie Tax doesn’t apply while the money stays invested inside the Roth.
Your child is also eligible to contribute to a traditional IRA, but it’s generally less beneficial at their age since they’re likely in a very low tax bracket and won’t benefit from the deduction. Still, it can be a useful option for families who want to front-load retirement savings and preserve flexibility for future tax planning.
If your Schedule C business already has a Solo 401(k) or another qualified retirement plan in place, and your child meets eligibility requirements, they may be able to participate. This option is less common and may not be practical unless you’re already running the plan, but it can be a powerful savings tool in the right situation.
Your child’s earned income can also be used to fund an education savings account, such as a Coverdell ESA or a 529 plan. For a Coverdell, your child must fall under the income limits which is typically the case given their low earnings. Alternatively, parents can contribute to these accounts directly, even if the child isn’t contributing their own earnings. For example, both 529 plans and Coverdell Education Savings Accounts (ESAs) allow contributions from parents, grandparents, or others on behalf of a beneficiary. This means the child can use their earned income to fund a Roth IRA, while the parents focus on building up education savings.
I’m not a sole proprietor; Is this still beneficial for me?
If you operate your business as an S corporation or C corporation, you can still hire your child and gain some tax benefits, but the rules are a bit different.
Wages paid to your child are deductible as a business expense, which reduces the corporation’s taxable income, but they are subject to payroll taxes (Social Security, Medicare, and FUTA) regardless of their age. You must comply with all standard employment requirements, such as paying reasonable compensation for actual work performed, maintaining time records, and handling proper payroll filings, including W-2s and tax withholdings.
Unlike sole proprietors, corporations do not receive special payroll tax exemptions for employing children under 18. While not as tax-efficient as hiring through a sole proprietorship, employing your child through a corporation can still be a smart income-shifting strategy when structured and documented correctly.
Thinking about implementing this strategy?
Hiring your child isn’t just a way to reduce your taxes; It’s a way to teach them responsibility, build generational wealth, and give them a financial head start.
Make sure to work with your tax advisor to set it up correctly! To get started, please reach out to a member of our team.
Aura Advisors is a boutique tax consulting and compliance firm working with start-ups, emerging growth companies, and affluent individuals. Making it safer for good people and good companies to continue to do good things.