By hiring your children you may be able to shift some income from you to them and have it taxed at a lower rate. Or better yet, not taxed at all. You may also be able to pay your son or daughter enough to enable him or her to begin a retirement account. When begun at a young age, through the magic of compounding, these accounts can grow to very significant amounts.

Let’s assume you are self employed and have a teenage child. If they legitimately work in your office you can pay them $5,000 for 2005 and they will have no federal or state income tax to pay. Their earnings would be fully offset by their standard deduction. Additionally, if they are under 18 and employed by a parent, they would not be subject to social security, unemployment or any of the other payroll taxes. If you had not done this, you would pay tax on the $5,000 at your marginal tax rate, which could be as high as 35%. And you would have been subject to self-employment tax as well.

If you are able to justify and pay the child $4,000 more, that $4,000 could be contributed to a traditional IRA account, resulting in no income tax to the child. As an alternative the $4,000 could be contributed to a Roth IRA account. Just a reminder; there is no current deduction for a contribution to a Roth account. But in most cases, the earnings and contributions can be withdrawn at retirement tax-free. If started at a young age this could be a tremendous benefit.

Putting the kids to work also works if you own a corporation, partnership or LLC. However, if others are also part owners, the child would be subject to social security and the other payroll taxes.


In order to take advantage of this benefit you will need to treat your child just like you would any other employee.

• The child must perform valid services for the business at a reasonable wage.

• You should keep time records.

• Have the child complete a form W-4, regarding income tax withholding.

• Pay the child in the form of a regular paycheck.

• File the necessary quarterly and annual payroll tax reports.

If you have any questions about putting your children on the payroll or want to learn how you might benefit from doing this, please give us a call.