How to Pay Your Children a Tax-Deductible Allowance

Mar 27

2 min read

If you own a business, paying your children to work in your business is a great way to provide them with a tax-deductible allowance while keeping more money within your family. However, this arrangement must be bona fide, and the salaries paid must be reasonable for the services performed. Even young children can be employed for simple tasks such as cleaning your office, opening mail, and mailing letters.

The Tax Benefits of Hiring Your Children

1. Exemption from Social Security & Medicare Taxes

One of the biggest tax advantages of hiring your children is that wages paid to a child under 18 years old are exempt from Social Security and Medicare taxes. This means you can deduct their wages from your business income without the added expense of paying the 15% in payroll taxes that would normally apply to an employee's compensation. Your child can work part-time, full-time, or even just during summer breaks to qualify for these savings.

2. Zero Income Taxes on Earned Wages

Another significant tax break is that a dependent child with earned income pays zero income tax on the first $3,700 they earn per year. For example:

If you hire three minor children and pay each $3,700 for their work, their tax liability is zero.
The money remains within the family unit, reducing taxable income.
Your total savings on federal, state, and local income taxes, along with Social Security and Medicare taxes, could amount to nearly 50% of the total wages paid—potentially saving your family around $5,550.

3. Additional Tax-Free Contributions to an IRA

In addition to tax-free earned wages, you can contribute up to $2,000 per child into an IRA (Individual Retirement Account). This strategy offers another potential tax advantage:

Your child benefits from early retirement savings.
The $2,000 contribution remains tax-free for them.
The family can save an additional $1,000 in taxes for each child with this contribution.

Keeping Proper Records

To ensure you receive these tax benefits, proper documentation is crucial. Here’s what you need to do:

Maintain clear records of hours worked, tasks completed, and wages paid.
Pay your child by check—avoid cash payments as they can be difficult to verify.
Keep detailed work logs or a journal to document their employment.
Ensure the work performed is legitimate and reflects fair compensation for their age and skills.

Final Thoughts: Consult a Tax Professional

While hiring your children can offer significant tax advantages, it’s always best to consult with a qualified tax professional to ensure compliance with IRS regulations. By structuring their employment properly, you can save thousands of dollars while teaching your children valuable work ethics and financial responsibility.

By following these steps, you can legally reduce your tax burden, keep more money in your household, and set your children up for financial success!

Written By ~ @AskForCorey