2025 tax tips for business owners hiring their children
One of the advantages of managing your own business is the opportunity to employ your children. This provides them with valuable work experience and contributes to reducing tax liability. If you are leveraging this opportunity, it is important to note that the employment tax regulations for family members can differ significantly from those applicable to other employees. Below is an overview of the employment tax rules and considerations when employing your child.
Tax deductions for reasonable wages
Tax rules for payments relating to your child’s employment depend on the child’s age and your business entity type. Businesses can deduct reasonable wages paid to a child, taxed at the child’s federal income tax (FIT) rate which is typically lower than the parents’ rate.
In 2025, the standard deduction for a child is the greater of $1,350 or $450 plus earned income (up to $15,000). Therefore, if a child earns $15,000 in 2025, the standard deduction offsets the entire amount, resulting in no taxable income. Once the child’s unearned income exceeds this threshold, Kiddie tax rules apply and they are taxed at the same rate as their parent(s).
If your business is a sole proprietorship or a marital partnership where you and your spouse are the child’s parents, then:
- Children are subject to income tax withholding regardless of age.
- Children under 18 years old are not subject to Social Security or Medicare withholding.
- After the child turns 18, your business would withhold income tax, Social Security, and Medicare taxes
- Payments to children under age 21 do not have to be reported for FUTA tax purposes.
- Your business would not need to include the child on its unemployment tax returns until the child turned 21.
Note: If the business is a corporation, a non-marital partnership, or an estate (even if it’s the parent’s estate), then payments for your child’s services are subject to income tax withholding, Social Security taxes, Medicare taxes, and FUTA taxes regardless of age.
IRA contributions made by children
If you employ your child, the child may establish either a ROTH IRA or a traditional IRA and contribute up to $7,000 of contributions made in 2025. Roth IRA withdrawals can be used toward educational expenses such as tuition, fees, books, and supplies without incurring an early withdrawal penalty. However, when you consider the standard deduction rate and lower tax brackets, the tax benefit of a deductible IRA contribution is minimal. As a result, a contribution to a Roth IRA is often the best option. In many cases, the parent can use funds to make the ROTH contribution without any gift tax consequences by using a portion of the gift tax annual exclusion.
This is a great way to give your child an early start on tax free retirement savings.
Payroll record keeping when employing your child
It is important to ensure that record-keeping best practices (e.g., keeping time reports, filing payroll returns, and basing pay on work performed, not on a relationship to the employer) are followed. Proper documentation will enable you to prove the deduction(s), if the IRS elects to examine your wages paid to your child(ren).
If you have questions on tax considerations specific to your child’s family business employment, consult your Keiter Opportunity Advisor.
