The power of compounding over decades is truly remarkable.
Growing up, I never realized how much wealth could be built by consistently saving small amounts.
If you’re a small business owner with kids, you may miss out on a powerful tax-saving strategy: hiring your children.
This move doesn’t just shrink your tax bill. It also gives your kids a head start on financial independence, thanks to the power of compounding over time.
The IRS-Approved Tax Strategy Every Business Owner Should Know
Yes, paying your children for work done in your business is completely legal.
The IRS allows it as long as the work is legitimate and the pay is reasonable for their tasks.
This means you can’t pay your kids $15,000 just for being cute, but you can pay them for helping with office work, social media, property upkeep, or other meaningful contributions.
Here’s the kicker: if your business is a sole proprietorship or a family-owned LLC, you don’t need to withhold payroll taxes for kids under 18.
Their wages are also tax-free, up to $15,000 in 2025, thanks to the standard deduction.
Teach Responsibility While Growing Generational Wealth
This strategy isn’t just about taxes. It’s about lessons.
When your children earn money through your business, they learn responsibility, work ethics, and how to manage their income.
These lessons can serve them well throughout life.
What if they used this income to open a Roth IRA?
This will allow money to compound for many decades tax-free!
Even small contributions made at a young age can grow into significant wealth over time.
Why Compounding Early Makes All the Difference
Here's why this is so powerful.
If a child begins investing at a young age, such as 10 years old, their savings will have a significant amount of time to grow.
With a 9% annual return, just $1,000 saved at age 10 could grow to over $74,000 by age 60.
If they contribute consistently, the results can be extraordinary.
This head start can be the foundation for a comfortable retirement or other financial milestones.
Starting early isn’t just a financial advantage; it’s the ultimate gift you can give your kids.
How to Stay Compliant and Maximize Benefits
To make this strategy work for you, follow these steps:
- Assign work that directly benefits your business.
- Pay wages that reflect what you’d pay someone else for the same tasks.
- Document everything: timesheets, job descriptions, and payments.
- Use the right business structure. If you’re operating as an S-Corp or C-Corp, consider paying your kids through a sole proprietorship or family-owned LLC to avoid payroll taxes.
Always ensure the work and pay are legitimate.
The IRS frowns on “loopholes” where the tasks or compensation don’t hold up to scrutiny.
Set Your Kids Up for Financial Success
Paying your children for real work in your business is a win for everyone.
It reduces your taxable income, teaches your kids valuable lessons, and sets the stage for lifelong financial growth.
More importantly, it gives them the gift of time—letting their money grow and compound for decades.
Are you ready to unlock this strategy and build a legacy of wealth and responsibility?
