How Paying Your Kids Through Your Business Can Save You Thousands

Paying your children through your business is one of the most powerful—and completely legal—ways to reduce your taxes while teaching them valuable financial and entrepreneurial skills. Instead of giving them after-tax money for sports, school, clothes, or activities, you can shift income into their lower tax bracket and take a business deduction at the same time. Here’s how it works (and why it’s so beneficial).

Why Paying Your Kids Is a Smart Tax Move

Children receive the same standard deduction as adults. In 2025, the first $15,000 of earned income is tax-free. If they earn that income working for your business, none of it is taxable to them—and you get to deduct their wages as a business expense. On NYS, the first $8,000 of earned income is tax-free.

Even better, if your children are under age 18 and you operate as a sole proprietor or a partnership between spouses:

• No payroll taxes are required

• No FICA

• No Medicare

• No FUTA or SUTA

You still get to claim them as dependents and take the Child Tax Credit.

This is not a loophole. It’s supported directly by IRS rules.

What Counts as Legitimate Work?

The key is making sure the work is real and age-appropriate. Examples include:

• Ages 6–12: Shredding papers, organizing supplies, filing, cleaning the office

• Teens: Social media support, office work, errands, data entry, marketing tasks, job-site assistance

You can pay them any reasonable amount that matches the work performed—whether that’s a few thousand dollars or up to the full $15,000 tax-free limit.

Documentation Matters

While you are not required to issue a W-2 for children under 18, doing so creates a clean paper trail. Their W-2 will simply show:

• Wages in Box 1

• Zeros in Boxes 3 and 5 (no FICA tax)

This documentation becomes especially valuable if you want to take the next powerful step: funding a Roth IRA. Once your child has earned income, you can contribute up to their annual earnings. Starting a Roth IRA as early as age 10–15 can create incredible long-term, tax-free growth.

Avoid issuing 1099s to minors. A 1099 classifies them as independent contractors—triggering 15.3% self-employment tax and unnecessary filings. Keep minors on payroll, not as contractors.

Strategies Once Your Child Turns 18

At 18, payroll taxes apply if they remain employees. But you now have more options:

1. Hire Them as Independent Contractors

If they help during summers or breaks, issuing a 1099 may make sense. They can run a small business, deduct expenses, and learn true entrepreneurship.

2. Add Them to Your Business’s Board

Your spouse and adult children can legally serve as board members of your LLC or corporation. This allows:

• Annual board meetings (even in travel destinations)

• Tax-deductible travel, meals, and meeting expenses

• Family involvement in real business discussions and planning

This strategy not only provides tax benefits but teaches your children how businesses operate.

Bonus Strategy: Create a Family Board of Directors

For families with adult children, forming a family board can be an incredibly effective long-term tax and wealth strategy. As long as meetings have a business purpose—reviewing finances, setting goals, evaluating strategy—associated travel and expenses may be deductible.

This layers additional savings on top of paying your kids properly.

The Bottom Line

Paying your children through your business is one of the simplest and most effective tax strategies available. It helps you:

• Shift income into lower tax brackets

• Deduct expenses you’re already paying for

• Teach your kids real financial and business skills

• Potentially fund tax-free retirement growth for them

Done correctly, this can save your family thousands every year and build multi-generational wealth.

At LCL Tax, we help families set up this strategy the right way—from payroll guidance to Roth IRA planning and family board structures.

Book a tax planning consultation today and let’s build a smart tax strategy for your family and your business.