30 SECONDS OF THERAPY: Tax Benefits of Employing Your Children in Business

Last but definitely not the least. Once again we promised $10,000 reduction in taxable income, but the reality is you can reduce up to $15,000 per child, so let's get to it.  

If you own a small business in the U.S., hiring your children can be a tax-savvy move. The IRS allows business owners to employ their children under certain conditions, providing significant tax advantages while instilling a strong work ethic in your kids. Here’s what you need to know about the tax benefits, legal requirements, and best practices for employing your children.

I. Tax Benefits 

1. Tax-Free Income: Children who work for their parents can earn up to the standard deduction amount ($15,000 for 2025) without owing federal income tax. This means they can earn wages tax-free, reducing your family’s overall tax liability. (IRS releases tax inflation adjustments for tax year 2025)

   
   

2. Payroll Tax Savings- If your business is a sole proprietorship or a partnership with both parents as the only partners, you are exempt from paying Social Security and Medicare (FICA) taxes on wages paid to your children under 18. Additionally, unemployment (FUTA) taxes do not apply to children under 21.  

   (IRS Family Employment Rules)

   
   

3. Business Expense Deduction – Wages paid to your child are considered a deductible business expense, reducing your taxable income. 

   (IRS Publication 535)

   
   

4. Retirement Savings Opportunities – Paying your child a reasonable wage allows them to contribute to a Roth IRA. Since their earnings may be below the taxable threshold, they can benefit from tax-free growth over time.  (IRS Retirement Plans)
   

II. Legal Employment Steps

1. Determine Tasks – Assign age-appropriate tasks that add value to the business. Click HERE. 

2. Fair Wage – Pay a reasonable rate comparable to industry standards.

3. Proper Records - Document work hours, payroll payments, and job descriptions. HERE.

4. Hire a Payroll Company  – Set up payroll with a company like   Gusto.com or  wave accounting. 

5. Issue a W-2 Form – Report wages properly to the IRS.

6. Open a Bank Account – Consider setting up a bank account in your child's name for payroll deposits.

PS: We dedicated all of February to covering essential tax tips for Home Health Therapists! If you’d like to revisit any of the insights we shared—including tax-saving strategies and calculation guides—you can access our blog here: 

30 SECONDS OF THERAPY:  Special Tax Edition – Maximize Your Earnings, Minimize Your Taxes.

30 SECONDS OF THERAPY: Special Tax Edition #2 - Big Tax Savings Small Changes.

30 SECONDS OF THERAPY: Cut Taxes, Save Time, Effort & Money!

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Disclaimer:  We are not tax, financial, or legal professionals. We are simply therapists trying to help you succeed.  Please discuss all these strategies with your tax and legal advisors. 

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