This is one of my favorite strategies because it can lower taxes, help your children build long-term wealth, and get them involved in the business from a young age.
Most parents are already spending money on their children. If your child can perform real work the business needs, consider giving them a legitimate role and paying them a reasonable wage through the business.
Done correctly, the business may receive a deduction, your child earns income, and those wages may be used to fund a Roth IRA.
At a high level, the business receives a deduction for paying your child for real work, while your child receives earned income that can be saved or invested through a Roth IRA.
Here is the basic flow:
The result is a powerful combination: you receive a business deduction, your child may pay little or no federal income tax, and the money can potentially grow tax-free inside a Roth IRA for decades.
You are taking money you were likely going to spend on your kids anyway and using it to teach them how to work, save, invest, and participate in the family business.
Your child must perform real work that is safe and reasonably within their abilities.
That does not mean the position must already exist. Small businesses are full of work that is postponed, handled inconsistently, or completed by the owner because no one else is available.
Think about what would help your business operate or market itself better. Then consider whether your child could learn to perform that work with the right instruction and supervision.
For example:
You can create a role specifically for your child. What matters is that the work provides real value, is actually performed, and is paid at a reasonable rate.
There is a special family-employment rule in the tax code that makes paying children under age 18 particularly attractive.
When a sole proprietor employs their child, the wages are generally exempt from Social Security and Medicare taxes until the child reaches age 18. The federal unemployment-tax exemption generally continues until the child reaches age 21.
The business still receives the wage deduction without incurring the usual Social Security and Medicare tax cost.
I recommend processing the wages through payroll and issuing a W-2. The wages are generally reported in Box 1 but excluded from Boxes 3 and 5. This documents the child's earned income, which may then be contributed to a Roth IRA.
This special treatment does not apply when an S corporation directly employs the child. The S corporation still deducts the wages, but normal payroll taxes apply.
In the right circumstances, a separate bona fide sole proprietorship may employ the child and provide legitimate services to the S corporation, preserving more of the available tax benefit.
The separate business must be real. It should provide actual services, maintain its own records, invoice the S corporation, and pay reasonable wages for work the child actually performs. Simply moving the child's payroll to a different business is not enough.
Once your child reaches age 18, the Social Security and Medicare tax exemption ends.
From that point forward, a sole proprietorship must process the wages under the normal payroll-tax rules. The business withholds the child's share of Social Security and Medicare taxes and pays the employer's share. Federal and state income-tax withholding continues to be determined by the child's withholding forms.
For a qualifying parent-owned sole proprietorship, the federal unemployment-tax exemption generally continues until the child reaches age 21.
If you have already been paying your child through an S corporation, nothing changes at age 18. The normal payroll-tax rules applied from the beginning.
The strategy can still be beneficial. The business receives the wage deduction, the child may be taxed at a lower rate, and the wages remain eligible earned income for a Roth IRA contribution.
The main difference for a sole proprietor is the additional Social Security and Medicare tax cost.
Now that your child has earned income, they can save some or all of it in a Roth IRA.
For 2026, the contribution is limited to the lesser of:
Once the money is inside the Roth IRA, it can be invested and potentially grow for decades without annual taxes on the investment income. If the Roth IRA rules are followed, qualified withdrawals—including the investment growth—can also be tax-free.
That is what makes this strategy so valuable. The business receives a deduction and potentially saves taxes today. Your child then gets to invest the earned income in an account that can potentially grow tax-free for the rest of their life.
The deduction provides the immediate benefit. The additional decades of potential tax-free growth may be worth far more.
You do not need a complicated system, but you do need to document the arrangement.
Create one folder for each child and keep:
Update the folder as the work is performed. If the deduction is ever questioned, the records should show that your child had a real job, performed the work, received reasonable compensation, and was actually paid.
Do not wait until December to issue one large payment and recreate the records afterward.
Children have helped in family businesses for generations. Somewhere along the way, many business owners stopped thinking about how their kids could contribute.
Get them involved. Give them real responsibilities. Pay them a reasonable wage for the work they perform.
The business may receive a deduction, and your child earns income that can help them begin saving and investing at an early age. It is also an opportunity to teach them how taxes, payroll, budgeting, and retirement accounts actually work.
You can save taxes today while helping your child build financial skills and potential tax-free wealth for the future.
Book a call and we'll determine whether paying your kids fits your business, calculate the potential tax benefit, and set up the right structure.
Author: Johnathan Perks, CPA, EA, MST, CA(SA)
Disclaimer: The information provided in this post is for informational purposes only and is not intended to be tax or legal advice. For advice based on your specific circumstances, speak with your tax and legal advisors.
