Outgrowing the Old Tax Strategy Myths: The Real Benefits of Hiring Your Kids in Your Business

December 26, 2025

If you’ve ever heard another business owner casually say, “Oh yeah, I just put my kids on payroll,” you may have wondered:Is that legit? Is it smart? And should I be doing it too?

Here’s the truth: hiring your children—done correctly—is one of the most powerful, IRS-approved tax strategies for small business owners. It reduces your tax liability, teaches your kids real financial skills, and keeps more money inside your household instead of sending it to the IRS.

But like anything involving payroll or the IRS, the how matters just as much as the why.

Let’s break it down clearly and honestly.

Why Hiring Your Children Can Be a Smart Financial Move

1. You Lower Your Taxable Income

When your child works in your business, their wages become a legitimate business expense.That means your business income goes down — and so does your tax bill.

You’re essentially shifting money from your taxed business income to your child, who is taxed at a much lower rate (or not at all).

2. Your Child Pays Little to No Tax

As of current tax laws, a child can earn up to the standard deduction amount tax-free.That means they can work, get paid legally, and owe zero federal income tax.

This is where strategy becomes powerful:You’re moving money from a high tax bracket to a zero-percent bracket — inside your own family.

3. You Keep More Wealth Inside the Household

Paying your child for legitimate work is a way to redirect money you’re already spending.

Think about it:Sports gear, clothes, summer camps, activities, food, school supplies — you’re covering those costs anyway.

When your child earns their own money:

• They can pay for some of their own expenses.

• You reduce your personal after-tax outflow.

• You retain more of your income inside your household instead of losing it to taxes.

4. It Builds Real Financial Literacy

This strategy isn’t just about taxes — it’s about raising kids who understand money.

Working for the family business teaches them:

• Responsibility

• Budgeting

• Time management

• Savings habits

• The value of earning before spending

Setting them up with their own bank account or Roth IRA amplifies the long-term impact.

5. You Can Potentially Avoid Payroll Taxes (Depending on Your Entity Type)

If your business is a sole proprietorship or partnership where only the parents are partners, wages paid to your child under 18 are generally exempt from:

• Social Security tax

• Medicare tax

That’s a massive savings.

Note: These exemptions don’t apply the same way for S-Corps and C-Corps — another reason entity structure matters.

But Let’s Be Clear: You Must Do This Correctly

This is where most people get it wrong.

The IRS allows this strategy, but only when it’s treated like legitimate employment — not a loophole, not a handout.

To keep this clean and audit-proof, you must:

✔ Assign real, age-appropriate work

Cleaning the office, social media help, filing, product prep, photography, admin tasks — it must be meaningful and documented.

✔ Pay reasonable wages

You can’t pay your 8-year-old $40 an hour to “test products.”Wages must match the market value of the work.

✔ Track hours and tasks

Timesheets are your best friend here.

✔ Pay from a business bank account

Never pay your child from your personal account.Ever.That’s the fastest way to lose this deduction in an audit.

✔ Have the proper employment paperwork

This includes:

• W-4

• I-9

• Job description

• Timesheets

• Payroll records

The strategy is legal — but only when properly supported.

Why We Recommend This Strategy for So Many Clients

At Outgrow Accounting & Finance, we help clients implement this every year because the benefits are too significant to ignore. When done right, it's a strategy that:

• Reduces taxes

• Strengthens your business documentation

• Teaches your kids the value of work

• Helps families build stable financial habits

• Keeps more money in your household — not the IRS’s

It’s one of the rare win-win strategies that benefits both your business and your family.

Ready to Add Your Children to Payroll the Right Way?

If you’re considering hiring your kids — or you’ve already been doing it informally — let’s make sure it’s set up correctly, legally, and in a way that actually gives you the tax benefits you’re looking for.

Book an intro call with Outgrow Accounting & Finance, and we’ll help you create a clean, audit-ready system that keeps more money where it belongs: with your family.