Hiring Your Kids: Make Your Child a Millionaire While Cutting Your Taxes
Tuesday, September 01, 2026
Today we are looking at one strategy, employing your own children in your business: paying them a real wage for real work, which moves income out of your bracket and into theirs, and at the same time hands your child the one thing they need to start building wealth decades early. The point is not a loophole. The tax code rewards a business owner who puts a family member on payroll, and a child's bracket is about as low as a bracket gets.
Here is why it matters. A wage you pay your child is a deduction for your business and, in the right setup, can reach your child almost entirely free of tax. The same dollars that would have been taxed at your rate land in your child's hands at close to zero, and once they count as earned income, they can be invested in a way that compounds tax-free for the rest of your child's life. Two wins from one decision.
A Real Example
Renee Castillo runs a single-member LLC that does wedding photography. Her son Owen, who is fifteen, already helps: he takes and edits photos, packages prints, schedules posts, and answers routine email. For years Renee did all of that herself or paid a contractor. This year she put Owen on the books and paid him a fair wage for the hours and the work, which came to $14,000 for the year.
Owen's federal income tax on that $14,000 was zero. A single person's standard deduction in 2026 is $16,100, so his wages sat entirely under it. Renee deducted the $14,000 on her Schedule C, which lowered both her income tax and her self-employment tax. If her own income sat where each additional dollar was taxed around thirty percent once income tax and self-employment tax are combined, that single deduction freed up roughly $4,000. And because Owen is under eighteen and the business is a single-member LLC taxed as a sole proprietorship, his wages were exempt from Social Security and Medicare tax as well. Money that used to leave the family stayed in it.
Where This Fits, and What It Is Like
This fits on the business-structuring map you already know. The break lives in the entity type. A sole proprietorship, a single-member LLC that has not elected corporate treatment (so it is disregarded and taxed as a sole proprietorship), or a husband-and-wife partnership is what exempts a child's wages from payroll tax: no Social Security or Medicare for a child under eighteen, and no federal unemployment tax for a child under twenty-one. The moment the business is an S-Corp or a C-Corp, that exemption is gone, because the employer is the corporation, not the parent. So the same LLC that draws a liability wall around your personal assets, while it stays disregarded, also opens this payroll door.
It is much like pouring water from a tank that is taxed every time you draw from it into a second tank the tax never reaches. The work your child genuinely does is the pipe between the two. Nothing is hidden and nothing is invented; the dollars simply move to where they are taxed least, and they move because real work was done for them.
The Second Half
Return to Owen, because the wage was only the first half. Renee took the income he earned and, with his earned income now on record, opened a custodial Roth IRA in his name and contributed to it.
Framed from this second angle, the strategy is not really a deduction, it is a head start. A Roth IRA can only be funded by earned income, which is money paid for work, not an allowance and not a gift. A child has none of that until a parent creates it. The wage Renee paid is exactly what unlocks the account.
Place the Roth on the same map. Earned income is the key that opens the Roth door, and the W-2 you just created is what produces the key. Inside the Roth, contributions grow and, when they are withdrawn in retirement under the rules, come out tax-free. For a fifteen-year-old, that is roughly fifty years of compounding the tax never touches.
It is much like a snowball you only have to pack once. The early years of packing are small and unglamorous, a few thousand dollars a season. Five decades of rolling downhill do the rest. To put rough numbers on it, contributing near the annual maximum for a stretch of the early years and then leaving it alone has, at the S&P 500's long-run average return, historically grown into seven figures by retirement. Past returns are not a promise, and the market does not move in a straight line. The engine is real, though, and the fuel is the wage.
Your Task: Check the Setup, Then Decide
Reading about this changes nothing on its own. The first real step is to look at your own situation honestly, and you can do it this week.
Start with the entity. Are you a sole proprietorship, a disregarded single-member LLC, or a husband-and-wife partnership, where a child under eighteen is exempt from payroll tax? Or are you an S-Corp or C-Corp, where the wage still works as a deduction but the payroll-tax exemption does not apply? Knowing which one you are tells you exactly what this strategy is worth to you.
Then look at the work. List the genuine, age-appropriate tasks your child already does or could do, and decide on a wage that matches what that work is actually worth. This is the part that has to be real: the work must happen, the pay must be reasonable for it, and you keep the same records you would for any employee, including a W-2. A wage that is documented and defensible is what separates a legitimate deduction from a position you cannot support if anyone asks.
Finally, decide on the wealth side. If keeping your child's federal income tax at zero is the goal, a wage that stays within the standard deduction does that. Decide how much of what they earn to route into a custodial Roth IRA, up to the annual limit of $7,500 in 2026 or their total earned income, whichever is lower, and decide whether you are setting this up now, while there are decades of compounding ahead, or later, when there are fewer.
Effective tax planning is rarely one dramatic move. It is a series of ordinary, defensible decisions made on time. Hiring your child is one of the few that pays you twice: once on this year's return, and once in the account your child will open the day they decide to retire.
Keep Moving Forward,
Business Structuring Secrets, LLC / Braden Chase, Manager
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