Hire Your Children: Family Wealth Shifting
How paying your children a reasonable wage for real work shifts income to a 0% tax bracket and funds their future.
Turn chores into tax deductions.
Hiring your children is a classic wealth-shifting strategy. You pay your child a reasonable wage for legitimate work they do for your business. Your business gets a deduction at your high tax rate, and your child receives the income at a 0% tax rate — thanks to their standard deduction.
This money can then be used to fund a Roth IRA for the child or pay for their extracurricular activities with tax-free dollars.
The $14,600 Family Savings Example
Scenario: You pay your teenager $14,600 (the 2024 standard deduction) for social media management and office cleaning.
- Wages Paid: $14,600
- Business Deduction: $14,600 (IRC §162)
- Child's Federal Taxable Income: $0
- Child's FICA Tax (if Sole Prop/LLC): $0
- Tax Wealth Reclaimed (at 37% bracket): $5,402
If you are a Sole Prop or Family LLC, children under 18 are exempt from Social Security and Medicare taxes.
Legitimate Work Only
The IRS requires that the work be real and the pay be reasonable:
- Real Tasks: Data entry, cleaning the office, modeling for your website, shredding documents.
- Reasonable Pay: You must pay them what you would pay a stranger for the same work.
- Documentation: Keep a timesheet, job description, and a signed employment agreement.
Implementation Steps
- Job Description: Create a list of duties your child will perform.
- Time Tracking: Have them log their hours daily or weekly.
- Payroll: Issue an actual paycheck or direct deposit from the business account.
- W-2: Issue a W-2 at the end of the year, even if no tax is owed.
Audit Protection
Do not just transfer money. If the child does not do real work, it is a "sham transaction." The IRS specifically looks for young children being paid large sums for "consulting." Keep age-appropriateness and documentation bulletproof. Consult a licensed professional before implementing this strategy.
See what this strategy saves on your own return.
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