How to Pay Your Children!

Can you pay your kids to work for your business? 100% YES! In 2024, you can pay your children, under 18 years old, up to $14,600 without any federal income tax!  

Personally, I think it’s one of my responsibilities as a parent to prepare my kids to become responsible adults and contributing members of our society. Teaching your children about money and work is a good thing.

How to do it: Generally, it’s best to put your kids on the payroll. If you have an active income-producing business, you should already have an S-Corp or LLC taxed as an S-Corp. You already have payroll set up, adding your kids to payroll is easy. If you only have rental properties, it’s going to be messy and risky to pay the kids out of your passive income. Again, it’s best if you have an active income-producing business, even better if your active income business is taxed as an S-Corp.

What are the limits and what are the rules? Generally, if you have a 3-year-old, what could this child possibly do to earn a paycheck?  One could argue that you put a picture of the kids on your website or any marketing material, and you pay your child a “modeling fee.” Will this hold up in an audit?  Maybe.  I’ve spoken with some CPAs that say “yes” and some that say “no.” The CPAs that say “no” also remind me that the audit risk is so very low with an S-Corp, or an LLC taxed as an S-Corp, that they’re not worried about it.

For me, I’m more comfortable with paying children 10 years old and up. The child may be doing filing, keeping the home office clean, or stuffing mailers for mail campaigns. Years ago, I taught one of my boys how to use quick books. It turned into a great “side hustle” when he was in junior high and high school.  He did the books for his youth group leader and a friend’s mechanic shop. Now, it is recommended that you keep a log. Track the task performed, hours worked, and payment. You’ll need to be sure you have a checking/savings account to deposit these checks into.

You don’t have to pay the children weekly or monthly. It could simply be a one-time payment at the end of the year.  

Since your child now has earned income, you’re able to open a ROTH IRA. If you paid your child $5,000 for the year, you are legally allowed to contribute the entire $5,000 into a ROTH IRA. Open an account with TD Ameritrade, pick some stocks you like, and pray we don’t have a major recession! Over time, the account should grow. If your child chooses to pull money out in the future, so long as the account has been open for 5 years, they could take distributions and only pay a 10% penalty, no taxes!

Children are expensive, and even if you don’t put their money into a ROTH IRA, making their allowance tax deductible is a blessing. There are several ways to pay your kids, so be sure to discuss this with your tax professional. If you don’t have a good tax professional, please do reach out. NCH has an amazing team of CPAs to support our ADPI Community.

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DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.