With summer fast approaching, many small business owners are thinking about hiring seasonal help. If your child is looking to earn some extra money, why not keep it in the family? Hiring your child can benefit your business—and your household finances—thanks to several tax-saving opportunities.
Here are three valuable tax benefits of putting your child on your payroll this summer:
1. Shift Business Income and Save on Taxes
One of the most significant benefits of hiring your child is the ability to transfer some of your high-taxed income into tax-free or lower-taxed income. When you pay your child a reasonable wage for legitimate work, your business can deduct that amount as a business expense.
Example:
Let’s say you’re a sole proprietor in the 37% tax bracket. You hire your 17-year-old daughter to help with office work. She earns $10,000 during the year and has no other income. Thanks to the $15,000 standard deduction for single filers in 2025, she pays no federal income tax—while you save $3,700 in taxes (37% of $10,000).
Even if your child earns more than the standard deduction, the extra income will be taxed at their lower rate (starting at 10%), rather than your higher one.
✅ Pro Tip: Keep accurate records of hours worked and tasks completed to ensure the wages are considered legitimate and reasonable by the IRS.
2. Reduce or Eliminate Payroll Taxes
If your business is not incorporated, hiring your under-18 child can help you save even more through FICA and FUTA tax exemptions:
-
FICA exemption: Wages paid to a child under 18 employed by a parent are not subject to Social Security or Medicare taxes.
-
FUTA exemption: Wages paid to a child under 21 by a parent are exempt from federal unemployment (FUTA) tax.
This applies to sole proprietorships or partnerships only between the child’s parents. If your business is a corporation or has other partners, these exemptions do not apply—but hiring your child can still be financially beneficial.
3. Set Up a Retirement Plan for Your Child
Giving your child the opportunity to save for retirement early is a great long-term financial move. Once your child has earned income, they are eligible to contribute to a retirement account such as a Traditional IRA or Roth IRA.
-
For 2025, your child can contribute the lesser of:
-
Their earned income – This includes wages or salary your child earns from working, such as helping out in your business. If they earn less than $7,000 during the year, their maximum IRA contribution is limited to that amount.
-
$7,000 – This is the annual IRA contribution limit set by the IRS for individuals under age 50 in 2025. If your child earns $7,000 or more, they can contribute the full amount to their IRA for the year.
-
If your business offers a SEP IRA, you can contribute up to 25% of your child’s compensation (up to $70,000 for 2025), depending on your plan’s rules.
⚠️ Heads up: Early withdrawals from a traditional IRA before age 59½ may incur a 10% penalty, unless they qualify for an exception (such as higher education costs or a first-time home purchase).
More Than Just Tax Benefits
Beyond the financial advantages, hiring your child helps them:
-
Learn about the value of work
-
Gain business skills and responsibility
-
Build a work ethic early in life
-
Start saving for the future
Hiring your child can be a smart tax strategy—and a great opportunity to teach them real-world skills. Just be sure to follow IRS guidelines, pay a fair wage for actual work performed, and document everything.
If you’re considering hiring your child this summer, or want help designing a tax-smart strategy, contact our team today. Tax laws change frequently, and we can help ensure you remain compliant while maximizing your family’s savings.
