How to Pay Your Kids in Your Business!

Paying Your Kids Through Your Business for Tax Benefits [00:00]

• A powerful and legal way to lower taxes and teach kids entrepreneurship is by paying them through your business.
• Instead of giving after-tax money for expenses, you can shift this income into their lower or no tax bracket, turning everyday support into a business write-off.
• This strategy can save families thousands annually.

Do you know one of the most powerful and legal ways to lower your taxes and teach your kids entrepreneurship at the same time? It's paying your kids through your business.

Why Paying Your Kids as a Strategy Works [00:39]

• For children under 18, they don't pay federal taxes on the first $15,000 they earn, similar to the standard deduction for adults.
• You can still claim them as a dependent and receive the child tax credit while they earn income tax-free.
• If you have a small business and pay them for legitimate services, you receive a tax deduction.
• This combines the benefit of your children earning income with you taking a legitimate business deduction.
• When paying your children under 18, you do not have to withhold payroll taxes like FICA, self-employment tax, SUDA, FUDA, Medicare, or Social Security taxes.
• You don't need to issue a W2 or 1099 for them, but you are allowed a tax deduction when they work in the business.
• They can exclude up to $15,000 of taxable income on their federal return.

So in 2025, we don't pay any federal taxes on that first $15,000. So for example, if your kids go out and work at McDonald's or work for you, they have that same standard deduction and you can still claim them as a dependent on your tax return and take the child tax credit, but when it comes to earned income, they don't pay taxes on that first $15,000.

Rules for Paying Your Kids [01:57]

• The work performed must be legitimate and age-appropriate.
• Younger children (5-6 years old) might do tasks like shredding paper, stuffing envelopes, or cleaning the home office.
• Older children and teenagers can take on more significant roles in the office, on work sites, or assist with social media and sales.
• You must be able to justify their wages based on their age and the work completed.
• You can pay them more than $15,000 or just a couple of thousand, depending on the child, business, and their tasks.
• It's important not to abuse the system.
• While a W2 is not required for documentation, it can be beneficial.
• You should not give them a 1099, as this can create other problems for them.
• Issuing a W2 with their earnings in box one and zeros in boxes 3 and 5 is important because they are not subject to FICA or payroll taxes as your own child under 18.
• The W2 serves as documentation, especially to help open IRA accounts.

But the point is, we've got to be able to justify their wages and the amount they're earning based on their age and the work completed.

Big Benefits of Paying Your Kids [03:28]

• You receive a tax write-off for the payments.
• Your children do not pay taxes on the money they earn.
• This is an opportunity to teach them about finances, entrepreneurship, work ethic, and how to participate in the family business.
• It provides valuable experience and help for your business.

This is a perfect opportunity to build that experience for them and in your business and also get some help.

Paying Kids 18 and Older [04:00]

• When you pay children 18 and older, you must withhold payroll taxes if you issue a W2.
• If they work like other employees, look like employees, act like employees, or are paid like employees, issue them a W2. You still get the write-off, and they don't pay federal taxes on the first $15,000.
• The ideal strategy is to pay them as a subcontractor, which is when a 1099 works.
• If they work intermittently, from college, or during summers, and help the business from time to time, you can 1099 them if they act and are treated like subcontractors.
• You get a tax write-off for what you pay them as a vendor.
• They claim this income for their own small business and take another round of write-offs on their tax return.
• This further enhances the opportunity to teach them entrepreneurship.
• A bonus is having adult children serve on your board of directors or advisors for an LLC or corporation.
• This allows them to take annual trips with you for legitimate board meetings, and you can write off travel, dining, and other related expenses.

So if your kids that are 18 or older are working alongside your other rank and file employees and they look like an employee, act like an employee, or paid like an employee, then issue them a W2.

Integrating Kids into Your Business & Retirement Accounts [06:10]

• There is significant opportunity to teach children about business, money, and finances while getting tax write-offs.
• Income can often be shifted into a non-taxable structure.
• You can take a write-off while helping your children adult and launch.
• Whether under or over 18, you can start teaching them about saving, investing, and building retirement accounts.
• Paying your kids through your business is a great opportunity to fund their Roth IRAs.
• It can also fund college savings accounts like Coverdale IRAs or educational IRAs.
• They can even be involved in your solo 401(k) for your business.
• This helps them build wealth and their future, with tax deductions available.
• Paying children through your business is smart tax planning and a way to pass on financial education and entrepreneurial values.
• This strategy helps save on taxes for everyone, provides valuable work experience, and strengthens family bonds while building wealth.

Whether your kids are under age 18 or over age 18, we want to start teaching them about saving, investing, and building their retirement accounts.