Big Beautiful Breakdown: Hiring Your Child to Work for Your Business

If you own a business and have children, new tax laws present a compelling tax opportunity. With the passage of the One Big Beautiful Bill Act (OBBBA), the “hire-your-child” strategy now has enhanced appeal.

Under the new law, the standard deduction for a single taxpayer increases—making it possible for your child to earn up to the standard deduction limit in wages from your business and pay zero federal income tax. While the legislation broadly touched many tax provisions, savvy business-owners with children can leverage this change to benefit both their business and their family.

How it Works

If your child earns wages from your business for real, legitimate work and their wages stay beneath the standard deduction threshold, they owe no federal income tax. The work must meet IRS standard, including age-appropriate duties, documented hours, a proper W-2, and more. Because the deduction wipes out taxable income, their tax burden is eliminated.

If you operate your business as a sole proprietorship or a spouse-only partnership, additional upside emerges. For wages paid to children under age 18, the parent-owner may avoid Social Security and Medicare payroll (FICA) taxes. And if the child is under age 21, wages may also be exempt from federal unemployment tax (FUTA). The business gets a full wage deduction on its Schedule C (or equivalent) while sidestepping those employment-tax costs.

Even for businesses run as an S- or C-corporation where payroll taxes apply, the strategy still adds value. The business deducts the wages, the child pays no income tax, and though payroll taxes apply, the net tax-savings scenario can still be very favorable.

Sample Scenario

Suppose you hire three of your children, each paid the standard deduction level (for example, $15,750) for legitimate work from your business. Each child pays no federal income tax. The business deducts each child’s wages, reducing taxable income and self-employment (or payroll) tax burden. The overall result: your tax-outlay drops and your family retains more after-tax income.

Key Considerations and Caution

• Legitimate work: The child must perform actual tasks, with reasonable compensation consistent with the business’s operations.
• Documentation: Hours worked, duties performed, time sheets, payroll reporting and W-2 issuance must all align.
• Business entity type matters: Sole proprietor/spouse-only partnership offers the greatest tax-advantage (avoiding FICA and FUTA entirely). Corporations still gain but payroll taxes apply.
• Age rules: For the FICA/FUTA benefit, age thresholds (under 18 / under 21) matter.
• Standard deduction threshold: Though the new law raises various standard deduction and tax-benefit levels, always verify current year limits with your tax advisor.
• State tax impact: Federal-level savings are clear, but state wage and employment tax rules vary and should be evaluated.

A Beneficial Strategy

For business-owning parents, hiring your child can create a win-win. Your child receives tax-free income, and your business lowers its tax bill through wage deductions. The strategy becomes especially powerful under the OBBBA’s expanded standard deduction and business-owner friendly rules. At Illumination Wealth, we emphasize working with a qualified local tax advisor—someone who understands both your business structure and family tax situation—to ensure this strategy is executed correctly and compliantly.

If you’d like to explore this strategy further for your business, let’s connect and walk through a customized scenario tailored to your entity type and family structure. Contact Illumination Wealth today to get started.