Smart Tax Strategies That Keep More in the Family
You work hard for your income—so why not keep more of it in the family?
If you’re supporting children, parents, or other dependents, you may be able to legitimately reduce your household’s total tax burden by hiring them to work in your business. Done properly, this is a powerful, IRS-approved tax-saving strategy.
How Does It Work?
When you pay a dependent for real work performed, those wages become a deductible business expense for you—and taxable income to them. Because dependents (especially children) are often in much lower tax brackets, or even owe no tax at all, the household saves significantly overall.
Here’s what to keep in mind:
- Minimum age: Anyone you hire should be at least 7 years old and genuinely capable of doing the work.
- Standard deduction in 2025: The first $15,000 of earned income is federally tax-free for a single filer, even if claimed as your dependent.
- Reasonable wage required: Pay them what you would pay a third party for the same work, adjusted for age and skill level.
- Paper trail matters: Write a job description, track hours worked with a timesheet, and pay them by check or direct deposit.
- Use the right type of account: Wages must go into an account in the child’s name. This could be a:
- Roth IRA (for tax-free retirement growth),
- Section 529 college savings plan, or
- Custodial account (which you manage until they’re an adult).
Real-World Example
Let’s say a law firm owner earning $450,000 hires his 15-year-old daughter to manage the firm’s social media and help with filing and scanning. She earns $12,000 for the year.
- The business deducts $12,000, saving roughly $4,800 in federal and state income taxes (assuming a combined marginal tax rate of 40%).
- The daughter pays zero federal income tax, since her earnings fall under the $15,000 standard deduction.
- She can use the funds for future college costs or contribute to a Roth IRA, growing tax-free for decades.
Reasonable Compensation
If your 12-year-old son mows the lawn for your rental properties, pay him what a landscaping service would charge. If your teen helps update your website or edits blog posts, research what you’d pay a freelancer or marketing assistant—and compensate accordingly.
Custodial Accounts and Qualified Expenses
You can use a custodial account to pay for things like private school, summer camp, or extracurricular activities. For example:
Instead of paying $3,000 for summer camp with your after-tax dollars, you could:
- Pay your child $3,000 for legitimate work,
- Deposit the money into their custodial account, and
- As custodian, pay for the camp from that account.
Effectively, you just deducted their summer camp cost as a business expense.
Tax-Free Income & Payroll Exceptions
If your business is a sole proprietorship or a partnership where both partners are the child’s parents, you do not need to withhold or pay Social Security, Medicare, or FUTA taxes for your minor children under age 18.
You’ll still need to:
- Issue a W-2 at year-end, and
- Help them file a simple tax return (if applicable).
Tax-Free Income & Payroll ExceptionsBottom Line
Hiring your children is a legitimate, powerful tax strategy that helps build their financial literacy and savings—while reducing your overall tax bill. It’s particularly underutilized by professionals such as attorneys and physicians with family-run businesses.
This is just one of many strategies that high-earning professionals can use to stop overpaying the IRS. According to the IRS, Americans overpay their taxes by more than $1 billion every year. With the right tax strategist by your side, you can put that money back where it belongs—in your family’s future.