Hiring your kids in your business

Putting your children on the payroll of your business is a well-established tax strategy — and one that gets people in trouble when they treat it as a paperwork trick rather than real employment. Done right, it can move business income from your bracket to your child's much lower one, deduct their wages as a business expense, and open the door to funding a Roth IRA at a very young age. Done wrong, it is exactly the kind of thing that collapses under an audit. This is educational; the details are fact-specific, so involve a CPA before you run payroll for a family member.

Why it works

When your business pays your child for legitimate work, three things happen. The wages become a deductible business expense, lowering your taxable business income. The income lands on the child's return, where the standard deduction can shelter a meaningful amount of earned income from federal income tax. And because it is earned income, it qualifies the child to contribute to a Roth IRA — decades of tax-free compounding that most people cannot start until adulthood.

The non-negotiable rules

• The work must be real and age-appropriate. A seven-year-old can model for your marketing photos or shred documents; a seven-year-old cannot plausibly be your bookkeeper.
• The wage must be reasonable — what you would pay a stranger for the same work. Paying a child $30,000 to file papers is the classic audit trigger.
• You must actually run it like employment: a job description, a timesheet or log of hours, and wages paid to the child (into an account for their benefit), not spent by you.
• File the required payroll paperwork and issue a W-2. 'Off the books' cash to your kid is not this strategy — it is the thing that gets the strategy disallowed.

The Roth IRA multiplier

The quiet superpower of this strategy is the child's Roth IRA. Earned income lets a minor contribute (up to the lesser of their earnings and the annual limit), and a custodial Roth holds it until adulthood. Money invested for a child in their single digits has decades to compound tax-free. Even modest annual contributions started young can grow into a striking sum by the time the child is an adult — an outcome ordinary families cannot replicate because their kids have no earned income to contribute.

The bottom line

Hiring your children is one of the rare family strategies that is both legitimate and genuinely powerful — when you treat it as employment, not a loophole. Give them real, age-appropriate work, pay a market wage, keep timesheets and issue a W-2, and route the money to their benefit, ideally partly into a custodial Roth IRA. Because the payroll-tax treatment depends on your business structure and the compliance steps are exacting, this is a strategy to set up with a CPA rather than improvise from an article.