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Want Your Kids Under Age 17 to Earn Close to $14,000 Income and Payroll Tax Free? Get a Financial Advisor and Tell Them That You Want to Do This
Financial Planning
9 min to read

Want Your Kids Under Age 17 to Earn Close to $14,000 Income and Payroll Tax Free? Get a Financial Advisor and Tell Them That You Want to Do This

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As featured in Usnews
As featured in USA Today
Los Angeles Times logo
inc logo
As featured in Financial Planning
As featured in InvestmentNews
As featured in Financial Advisor Magazine
inc logo
Citywire logo
BuiltinLA logo
PlanAdviser logo
Los Angeles Business Journal logo
Entrepreneur logo
Fobes logo
CEOWorld logo
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Did you know that you could get your children to earn money, without the burden of income and payroll tax? This secret that the wealthy take advantage of could be utilized by your family as well.

Have you ever wondered how one particular family in school had the opportunity to make that classmate’s family look like they were living an extravagant life? Or how one of your current children’s friends seems to have a lot more money than any of their peers?

Rich parents aren’t always the case. In fact, there has been a business loophole that has been occurring for quite some time, yet more and more families are getting in on it.

Thanks to financial advisors, savvy families who are looking out for their children’s future have multiple opportunities to go out there and create generational wealth that transfer from them, to their children, even if they aren’t making millions of dollars.

So what’s the secret?

And can it be taken advantage of by any family, no matter their income range or background?

https://www.youtube.com/watch?v=StuqVGdwF68

Employees at companies may need to get a little creative about how they go about doing this, but it’s definitely possible. Yet for small business owners, you may just have everything that you need to get this going right away.

First, we will address how people who currently operate a business can incorporate this strategy into their mix, then at the end, we will share how an employee can restructure their household a bit to take advantage of these benefits as well.

I mean who wouldn’t want close to $14,000 a year, income and payroll tax free for their children? 

That money could be utliized for them to purchase their own lunch, books, electronics, entertainment vices and potentially their first car. Almost half of it could be put into a Roth IRA each year, and by the time they reach the age that they could pull it out, your child could be a millionaire as they approach the retirement years of their life.

Not to mention, some of that money could be allocated to a college education fund and completely cover their tuition.

What you choose to do with the money is up to your family’s discretion, however the benefits go well beyond what one could ever imagine. 

So what’s the secret?

It’s hiring your children in your business. However, there are guidelines around this, so you will want to speak with a financial advisor so you can set this up properly.

Hiring your children in your business can be a powerful financial strategy — but the details and mechanics of this strategy are often misunderstood or misrepresented. 

We will explore what hiring your children entails and how it can help you save on taxes and set your family up for generational wealth. We’ll also dispel some of the myths surrounding this strategy so that you can make an informed decision about whether or not it’s right for you.

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So, Who Is This Strategy Right For?

So... Who Is The Strategy Of Paying Your Children $14,000 Right For?

First, you must have self-employment income and know the rules.

For this strategy to be an option, you must have self-employment income. So, this strategy will not be available if your only income is from a W2 job. But, if you decide to start a self-employed side hustle, even as an independent contractor working in the gig economy, that could open up this unique strategy for you and your children. 

Understanding the Rules and Benefits

Here’s how it works: By hiring your child in your business, they can earn close to $14k without paying income taxes. 

That’s because of the IRS rules around earned income for dependents. For example, a dependent (your child) can earn up to $12,950 for 2022 ($13,850 for 2023), without paying income taxes or filing a tax return. That said, if your child has had any income withheld for federal tax payments, it may be wise for them to file a tax return and receive those payments as a refund. 

In addition, and this is the really unique part: according to the IRS, as long as your business is either a sole proprietor or partnership with your spouse and your child is under the age of 17, you do not need to pay any payroll taxes on their wages. This means that the typical 15.3% combined payroll tax, including Social Security, Medicare, and FUTA (unemployment), does not apply. But according to the IRS, your child’s wages will be subject to payroll taxes if the business is a corporation, a partnership (unless each partner is a parent of the child), or an estate (even if it is the estate of the deceased parent of the child).

Now, this might sound like a great opportunity for you and your kids, but before you go all in, it’s best to get guidance from a financial advisor because the details are essential. A trusted financial advisor can help you ensure everything is done properly and avoid any problems with the IRS. 

Can You Really Pay Your Child to Work for You?

Can You Really Pay Your Child to Work for You?

The short answer is yes: you can pay your child to work for you, but there are rules to consider.

  1. First, you must ensure that your child’s job is age-appropriate and related only to your business. For example, you can’t hire your 5-year-old to handle your business bookkeeping, and you can’t pay your child to do chores around the house through your business. Remember, your child must be doing legitimate work for your business for this strategy to be legitimate. If your child is a teenager and they love art, this is a ripe opportunity for them to create graphics for your business on social media. If they love to write, they could contribute to website copy on your site, or even contribute to some deliverables that are provided to clients. If they love to be organized, they could help you organize and file your physical or digital records for your business as well. There are countless ways to get your child(ren) on a living wage and contributing to necessary tasks within a business and it would also help to improve the level of depth of their college applications and give them some of the skills they would require when they are ready to enter into the workforce or open their own business in the future, ultimately helping set them up for future success.  
  1. Second, you must pay your child a reasonable wage and keep track of all hours worked. So, if you’re hiring your child to shred papers and clean up your business office, you must pay them a reasonable wage for those services. A great way to figure out a reasonable wage is to find out what other companies are paying for similar services and stick to that ballpark figure. The good news is that a lot of states have rolled out new employment laws which require them to now include pay transparency with their job positions, so finding this information would be much easier than it was in the past. In addition, it’s good practice to keep track of all the hours your child works and their compensation.
  1. Third, you must fill out the correct forms and paperwork. When hiring your child, approach it as you would with anyone else. That means having your child fill out the federal Form W-4 and any applicable state Form W-4s. The W-4 Form is also known as a “withholding” form. Long story short, it tells you how much to withhold from your child’s pay for income taxes, if any. Remember that your child won’t owe any income taxes as long as their total compensation is under their standard deduction for the year, but the IRS still requires income tax withholding. So, if any amounts are withheld throughout the year, your child should file a tax return to claim those amounts as a refund. Lastly, they must also fill out an employment eligibility verification form, known as an I-9 Form. It will verify your child’s identity and ensure they are authorized to work in the US.

Once everything is set up properly, your child can earn close to $14k tax-free in 2023 and beyond! 

Paying your child to work for you can be an advantageous opportunity for both parent and child. It gives children a greater understanding and appreciation of the money earned from hard work and gives them a chance to develop valuable life skills such as time management and organization. And on top of that, this is a unique opportunity to not only pay your child for essential services in your business without paying any income or payroll taxes up to a certain amount, but to teach them valuable skills that they could utilize for the rest of their life when they enter into the workforce.  

So, How Much Can You Really Pay Your Child Tax-free?

How Much Can You Really Pay Your Child Tax-free?

As a parent, you may be asking yourself how much you can pay your child without being responsible for Social Security, Medicare, FUTA (unemployment), and income taxes. 

If your child is younger than 17 and you are a sole proprietor or in a partnership with your spouse, any wages paid to the child are exempt from payroll taxes (Social Security, Medicare, and FUTA.) But remember, if you own a corporation or another individual partner with you — apart from your spouse — in a business venture, then the same exemptions do not apply, and Social Security, Medicare, and FUTA taxes must be filed accordingly.

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However, income tax must always be withheld from their wages regardless of age, but remember, your child can earn up to the standard deduction ($13,850 for 2023 or $12,950 for 2022) without paying any income taxes. So, even though income tax must be withheld each year, children who have paid more than what was due may file for refunds during the year-end filing season.

Is This Strategy Really Legal?

Is This Strategy Really Legal?

For many, this strategy can seem too good to be true, making them question the legality of this unique tactic.

At a high level, this strategy is perfectly legal, but you have to follow the rules. Remember, you can’t hire your child to do chores around the house and pay them through your business. That would be illegal. 

In addition, if you’ve decided to pay your child the full $13,850 per year and set their salary at $1,154 per month, but they only end up working for you 20 hours per month answering phones and shredding papers, then you’re paying them $57 per hour to perform basic clerical services. Again, this could be a major red flag as the IRS would likely consider this an unreasonable wage. But, if your child is a bit older and can perform bookkeeping or marketing services, that $57 per hour may be more in line with a reasonable wage in your area. 

And again, make sure that you keep detailed records of the hours worked and fill out the necessary paperwork when hiring your child. This will ensure you’ve covered your bases when utilizing this powerful strategy.

Will Your Child Need to File a Tax Return?

Filing requirements vary by situation, so consult with a trusted advisor or tax preparer. 

That said, for 2023, your child can earn up to the standard deduction of $13,850 without having to file a tax return. But, it’s important to remember that if your child has had any income taxes withheld throughout the year, they may still benefit from filing a tax return and could receive a refund even if they don’t have a filing requirement.

In addition, the filing requirement listed above is for any amount your child earns from a job, known as “earned income.” But different rules apply for any amounts your child earns from investment income, also referred to as “unearned income.” For example, for unearned income, a child who earns $1,150 or more in 2022 must file a tax return.

So, whether or not your child is required to file a tax return will depend on the amount and type of income they’ve earned. But remember, even if your child does not have a filing requirement, it may be worthwhile to file a return if they’ve had any amounts withheld for taxes throughout the year.

How I Plan to Use This Strategy With My Kids

How I Plan to Use This Strategy With My Kids

As a self-employed sole proprietor with kids, I’ve considered using this strategy.

That said, my daughter is under three years old, and I don’t have a legitimate need to hire her in my business at this point. But, I have plans to hire her as she grows older and has interests and skills that could be beneficial.

For example, part of the work I do in my business is on my business: sending and tracking invoices and logging transactions in my bookkeeping software. These are fairly standardized tasks that could be perfect for my daughter at some point. In addition, I also schedule automated posts for various social media channels each month. Again, this could be another perfect task for my daughter that takes time and data entry.

And one exciting part about this strategy is that if I end up hiring my daughter and paying her through my business, that earned income will qualify her to contribute to a Roth IRA each year. So by combining these two strategies, I could give my daughter a powerful jump-start on retirement savings while also paying her through my business, both income and payroll, tax-free, to a certain amount.

How Does This Strategy Work With Roth IRAs?

How Paying Your Children Through a Business Work With Roth IRAs?

This strategy can go hand-in-hand with helping your child get a jump-start on retirement. 

That’s because to contribute to a Roth IRA, your child needs to have earned income. And by paying your child to work in your business, they are receiving earned income. So for 2023, if your child earns up to $6,500, they can contribute the full amount to a Roth IRA. 

But what if your child doesn’t want to save their hard-earned money into a Roth IRA?

Interestingly enough, your child doesn’t have to contribute the same dollars they earned. So, by earning at least $6,500, they can max out a Roth IRA, but you could offer to match their contribution, allowing them to contribute $3,250 and keep $3,250 of their earnings. Then, you can contribute the other $3,250 to their Roth IRA, maxing it out for the year.

This can be an incredible way to set your family up for generations by accomplishing a lot of the heavy lifting for retirement early on. 

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What About a 529 College Savings Plan?

What About Paying Your Children then Putting that Money into a 529 College Savings Plan?

Another option to consider would be helping your children get ahead on their college savings by saving their income in a 529 college savings plan.

A 529 plan is an investment account that lets you grow your money tax-free and distribute it tax-free, as long as the funds are used for qualified education expenses. This could be a great way to help your children get ahead on their college savings and avoid massive student loan debt down the road. When setting up a 529 plan, parents would need to list themselves as the account owner and their child as the account's beneficiary. 

In addition, when selecting a 529 plan, it’s important to understand that many different options are available. All fifty states have their own 529 plan, but you do not have to use the plan in your state. So, be sure to do your research when selecting the plan that’s right for you. Consider any potential state tax credits or deductions, and be sure to evaluate the fees and investment options within the plan. 

How Much Will Those Contributions Be Worth Someday?

How Much Will Those Retirement Contributions from My Children's Earnings Be Worth Someday?

To understand the value of this strategy, let’s look at an example.

Assuming your child can max out a Roth IRA of $6,500 for one year at age 10, that would grow into a staggering $268,000 by age 65, assuming an inflation-adjusted rate of return of 7% per year. That’s the power of compounding over time.

But What if Your Child Wants to Become a Millionaire?

If you want to use this strategy to help your child become a millionaire by age 65, then they would need to have saved roughly $36,000 by the time they’re 17 years old. That means they would need to contribute $6,000 per year to a Roth IRA for just 6 years. This calculation assumes that your child earns a 7% rate of return after inflation from age 17 to age 65. 

Additional Benefits of Hiring Your Children in Your Family Business

Hiring your children in a family business can reap myriad benefits beyond financial advantages. 

It can serve as an educational experience, teaching the child the ins and outs of running a business and an excellent opportunity for personal and professional growth. Not only will they be able to develop necessary job skills, but work experience can also lead to invaluable real-life lessons in responsibility, multitasking, collaboration, and problem-solving, among other skills. 

Furthermore, hiring your children brings a unique quality of trust—knowing their skills and abilities firsthand, you’ll be aware of any help or guidance you may need to provide them so that they grow with the business in ways that benefit those involved.

Hiring Your Child Can Have Some Advantages, but You Must Play by the Rules

In the end, hiring your child can have some powerful advantages, both financial and otherwise. 

Again, this strategy can allow you to pay your child close to $14,000 per year, income and payroll tax-free, while also opening up the possibility of contributing to a Roth IRA on their behalf. If you're self-employed, this could be an incredible opportunity to set you and your family up for generations to come.

But, to execute this strategy correctly, you must play by the specific rules outlined by the IRS. To do so, it may be best to consult a trusted financial advisor to ensure you understand everything correctly. 

If you need help understanding and executing this strategy, working with a financial advisor is a smart idea. Find a financial advisor near you and keep tabs on them using our search tool

Before we leave off, we mentioned that we would share how employees could start to take advantage of this as well. 

How to Transition Into Becoming an Employer for Your Child to Earn Additional Capital From Either Your or Your Children’s Passions

How to Transition Into Becoming an Employer for Your Child to Earn Additional Capital From Either Your or Your Children’s Passions

If you have a job, you may have found some things that you excel at. That could be writing, design work and a plethora of other skills that you have acquired over the years in your professional life. In addition to that, your child(ren) may have exhibited areas that they have excelled as well. These skills could be a great way to go about earning an additional income for your household that works in your children’s favor.

First, you should come up with some ideas on how to monetize your family’s combined skillset. After that, you should do some research on platforms that allow freelance workers and businesses to offer services, or explore social media platforms that may have monetization schemes built into them. These are a plethora of platforms that will help freelancers from various fields to connect with people and businesses that need those services, from tutoring to graphic design, to writing articles to being a social media manager, helping with bookkeeping and so much more. 

After you figure out what you want to do, you should meet with your current or future financial advisor and talk to them about how you want to set up a business that both you and your children can earn money from. After you meet with them, they will set you up with the groundworks on what type of business to create and how to maximize those benefits, along with potentially even discussing how to allocate your family’s future business earnings.

This should help you get on track to helping your children get off on the right track in life. Not to mention the additional income that you and your spouse could earn as well. Who knows. Maybe your children could even have a million dollars by the time they retire, if your family is able to pull this off. We’re rooting for you.

We look forward to hearing about your results as well.

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Written by Anders Skagerberg, CFP

Fact checked by Billy Quirk

Reviewed by KJ Kim

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