Paying Kids Through Your Business

If you are a business owner and have children, you might not be taking advantage of a simple strategy that can save you taxes, while also getting a jump start on your kid’s retirement savings.

Through your company, you can hire your child as an employee and pay them a reasonable wage for the work they perform for the business. This one action is beneficial in multiple ways, which include:

  1. The wages you pay your kid is deductible by the business. Thus, you are lowering your income from the business which, in turn, lowers your taxable income.
  2. Any person that earns W-2 wages is eligible to open and contribute to a Roth IRA in their name. The main benefit of a Roth IRA is that it grows tax-free and any distributions you take from this type of account are also tax-free. Keep in mind that their contribution amount is limited to the lesser of their W-2 income or the annual contribution limit ($6,000 for 2022; $6,500 for 2023).

If you were to pay your kid up to the yearly standard deduction ($12,950 for 2022; $13,850 for 2023), your child would not be subject to Federal income taxes. Thus, they would be able to contribute money into their own Roth IRA tax-free, the money would grow tax-free, and they would be able to take distributions from this account tax-free.

The below picture shows the impact that early investing can make over the course of a person’s lifetime.

Additionally, this article does a great job at

explaining the benefits and tax implications of this strategy, as well as giving you a step-by-step guide for how to go about implementing it.,2021%2C%20and%20%2412%2C950%20in%202022