Hiring Your Kids in a Family Business — Tax Benefits
For families that own a Schedule C business or a partnership between spouses, employing your own children can shift income to their (usually 0%) tax bracket, fund a Roth IRA, and even avoid FICA. The rules are specific.
The FICA and FUTA advantage
Wages paid to your child under age 18 by a Schedule C sole prop or a partnership where both partners are the parents are exempt from Social Security, Medicare, AND FUTA.
This does NOT apply to S-corps or C-corps or partnerships with a non-parent partner — those pay full payroll tax on wages to your kids.
Wages from age 18 to 20: exempt from FUTA but not FICA.
The income tax advantage
Your child can earn up to the standard deduction ($15,000 in 2025) tax-free.
You deduct the wages as a business expense — usually at your marginal rate of 24–37% plus SE tax.
Family tax savings can easily be $4,000–$7,000/year per child for a genuinely-employed teenager.
The Roth IRA opportunity
Earned income means the child can contribute to a Roth IRA — up to $7,000/year (2024/2025).
$5,000/year into a Roth from age 12–18 growing at 8% is over $2 million by retirement. Untaxed.
The rules that keep it legit
The work must be real, age-appropriate, and actually performed. A 10-year-old modeling for your website or organizing inventory is fine. A 4-year-old 'consulting' is not.
Pay a reasonable market rate for the work. Overpaying blows the strategy.
Document with timesheets, job descriptions, and W-2s. Run through actual payroll (Gusto, QBO Payroll).
Deposit wages to the child's bank account (which can be a custodial account you manage).
What breaks the strategy
Paying the child for chores you'd expect them to do anyway.
Not running the wages through actual payroll — journal-entry-only wages are a red flag.
Overpaying, then having the child 'give' the money back to fund household expenses.
A quick disclaimer
This article is general information for Montana small business owners, not tax, legal, or accounting advice for your specific situation. Rules change, and how they apply depends on facts we don't know about you. Before acting on anything you read here, talk to a qualified professional. If you're a Montana business owner and want a real conversation about your books, payroll, or tax, that's what Marlow Accounting is here for — call 406-290-1214 or schedule a discovery call.