Hire Your Kids. Legally. Save Thousands.
This sounds like a loophole, but it's completely legitimate and specifically recognized by the IRS. If you're a sole proprietor or single-member LLC with kids, you can put them on payroll, deduct their wages as a business expense, and potentially pay zero tax on that money.
The IRS has allowed this for decades. Most freelancers have no idea it exists.
How It Works
When you hire your child to work in your business:
- You deduct their wages as a business expense on Schedule C, reducing your net profit
- The wages shift from your high tax bracket to your child's bracket
- For children under 18 working in a parent's sole proprietorship, those wages are exempt from Social Security and Medicare taxes entirely (no FICA, for either party)
- If your child's total income stays below the standard deduction ($15,750 for 2025), they owe zero federal income tax
The math for a self-employed parent in the 22% federal bracket plus 15.3% self-employment tax: every $15,750 paid to a child saves roughly $5,500 in combined taxes.
The Rules That Make It Work
The work must be real. Your child must perform actual, legitimate services that your business needs. The IRS scrutinizes this hard. Paying your 8-year-old $14,000 to "be the CEO of vibes" will not survive an audit.
Real jobs for different ages:
- Ages 7-10: organizing supplies, filing, cleaning the office, shredding documents
- Ages 11-13: data entry, research, photographing products, stuffing envelopes
- Ages 14+: social media management, graphic design assistance, administrative work, customer service
The pay must be reasonable. Pay what you'd pay a stranger for the same work. Paying your 12-year-old $14,000 to occasionally help organize files won't fly. Paying them $12 an hour for 10 hours a week at a legitimate job is defensible.
They must actually receive the money. Pay them by check or bank transfer. Open a custodial bank account in their name. The money needs to actually move.
Document everything. Job description in writing. Timesheets or logs of hours worked. Pay stubs. Bank records showing actual payment.
The FICA Exemption: The Big Win
For children under 18 working in a sole proprietorship or partnership where both partners are the parents, wages are exempt from Social Security and Medicare taxes. This exemption disappears if you operate as a corporation (including S-corp) or employ a child through a third-party staffing arrangement.
This is why this strategy works best for sole proprietors and single-member LLCs taxed as sole proprietors.
For children 18 and under, FUTA (federal unemployment tax) is also exempt. For children under 21, FUTA is exempt if you're a parent employer.
Roth IRA: The Bonus Move
Your child now has earned income, which allows contributions to a Roth IRA.
A child can contribute up to the lesser of their earned income or the annual IRA limit ($7,000 for 2025) to a Roth IRA. The parents can fund the Roth with their own money as long as the contribution doesn't exceed the child's earned income.
Roth IRA money grows tax-free. A $7,000 contribution at age 12 has around 60 years to compound before retirement.
The full play: pay your child $15,750, they pay zero income tax, you deduct it from your business income, and contribute some of those wages to a Roth IRA that will be worth a small fortune in 2070.
What the IRS Looks For
The IRS knows this strategy exists and auditors look for these red flags:
- Wages that seem impossibly high for the child's age and actual duties
- No documentation of hours worked or services performed
- Wages paid to children not actually old enough to do the job
- Payment by cash with no paper trail
- No actual bank account in the child's name
Treat this like a real employment relationship because it is one. The documentation requirement is the cost of the strategy.
What If You Have an S-Corp?
The FICA exemption doesn't apply to S-corporations. Your child's wages would be subject to Social Security and Medicare taxes like any other employee. The income shifting still works, but you lose the FICA savings that make the strategy especially attractive.
At lower income levels, a sole proprietorship or LLC taxed as a sole prop may actually be the better structure for this reason.
The bottom line: if you have legitimate work your kids can do, a sole proprietorship or partnership, and you're willing to run it like a real job, this is one of the most favorable legal tax strategies in the code. The IRS wrote it in, not around.
Sources
- IRS Publication 15: Employer's Tax Guide - FICA exemption for children under 18 employed by sole proprietor parents
- IRC Section 3121(b)(3)(A) - Statutory basis for FICA exemption
- IRS Topic No. 756: Employment Taxes for Household Employees - Employer obligations for family employees
- IRS Standard Deduction 2025 - $15,750 standard deduction shelters child wages from income tax
FICA exemption applies only to sole proprietors and partnerships where both partners are parents. S-corps and C-corps do not qualify for the FICA exemption per IRC § 3121(b)(3)(A).
Ready to stop overpaying taxes?
WriteOff's AI finds every deduction, tracks expenses as you go, and estimates your quarterly taxes automatically. No spreadsheets. No guesswork.
Related Articles
When Your Business Loses Money: How Net Operating Losses Work for Freelancers
A bad year in your freelance business can create a net operating loss that reduces taxes in future profitable years. Here's how NOLs work, the 80% limitation rule, carryforward rules, and how to make sure you're capturing losses correctly.
The Augusta Rule: How Renting Your Home to Your Own Business Creates Tax-Free Income
The Augusta Rule lets homeowners rent their home to their own business for up to 14 days per year and collect that rental income completely tax-free. Here is how it works, who can use it, and the documentation that keeps it legitimate.
7 Tax Mistakes Freelancers Make That Cost Real Money (And How to Fix Them)
These are not obscure technicalities. They are the specific errors that show up year after year in freelancer tax returns - missed deductions, wrong calculations, and avoidable penalties that together cost thousands of dollars.