Hiring Your Kids in the Family Business: A Tax Strategy That Pays Twice

Imagine paying your 12-year-old $12,000 for legitimate work, deducting it as a business expense—and having them pay zero federal income tax. That’s not a loophole—it’s an IRS-recognized, court-tested strategy that can save thousands in taxes while teaching your kids valuable life lessons about money, work, and responsibility.

 

But there’s more: you can legally pay even younger children when their image or likeness appears in your business marketing. Whether your teenager manages social media or your toddler stars in your ads, these strategies can offer exceptional tax and educational benefits when implemented correctly.

 

The Tax Math That Matters

For 2025, the standard deduction for a single filer is $15,750.

That means your child can earn up to that amount tax-free—while your business deducts it at your higher marginal tax rate.

 

Example: The $12,000 Sweet Spot

Sarah runs a marketing agency in Tucson and is in the 32% tax bracket. She hires her 14-year-old son for legitimate work, paying him $12,000 per year.

Tax Type	Savings
Federal (32%)	$3,840
Arizona (2.5%)	$300
Self-employment (14.13%)	$1,696
Total Savings (for Sarah)	$5,836

 

While Sarah enjoys roughly $5,836 in potential tax savings from this deduction, it’s important to note that as a high-income earner already paying full self-employment tax, her savings would mostly come from the federal and state income tax deductions—not from self-employment taxes. Meanwhile, her son pays zero federal income tax.

 

When Kids Earn Above the Standard Deduction

If your child earns more than $15,750, you still win. You’re simply shifting income from your high bracket to their low bracket.

 

Example: A 17-year-old earns $25,000 working part-time during school and full-time in summer.

- Your deduction: $25,000 × 32% = $8,000 saved.
- Child’s first $15,750 = $0 tax (standard deduction).
- Next $9,250 taxed at 10% = $925.
- Net family savings:$7,075.

 

You’ve effectively moved income from a 32% bracket to a 10% bracket—a win for both generations.

 

The Golden Rule for Sole Proprietors

If your business is a sole proprietorship or single-member LLC, wages paid to your children under 18 are exempt from:

• Social Security tax (12.4%)
• Medicare tax (2.9%)
• Federal unemployment tax (FUTA)

That’s an extra $2,295 saved on a $15,000 salary.

 

Note: S-Corps and C-Corps don’t get this exemption—children’s wages are subject to payroll taxes—but you still benefit from income shifting.

 

The Image & Likeness Strategy: When Kids Become Your Brand

Here’s the lesser-known opportunity: paying your kids for the use of their image and likeness in your company’s marketing. This IRS-accepted, court-tested approach works even for infants.

How It Works

If your child appears in your:

 - Website photos or videos
- Social media posts
- Ads, brochures, or print materials
- Email campaigns
- Marketing videos or testimonials

You’re using their commercial image—just as you would with a paid model. That means you can pay them a fair market rate.

Legal Support & IRS Precedent

The landmark case Morehouse v. Commissioner upheld payments to children for promotional activities. The IRS recognizes this when:

- A written agreement exists for image use.
- Payments are reasonable and documented.
- The child’s image is actually used in marketing.

Best Practices for Image Rights

1. Model Release Agreement – Define payment, usage rights, and duration.
2. Comparable Rate Research – Document typical child model rates from local agencies or stock photo sites.
3. Proof of Use – Keep ads, posts, or photos showing actual use.
4. Track Payments – Record payment amounts and timing.

Typical Compensation Ranges:
- Photo shoot: $500–$2,000
- Annual image license: $2,000–$10,000
- Video appearance: $1,000–$5,000
- Ongoing social media use: $200–$500/month

 

Combine Both Strategies for Maximum Impact

Many families combine both methods:

Age	Strategy	Example
0–6	Image rights	Appear in ads or videos
7–10	Wages + minor tasks	Filing, organizing, cleaning
11–18	Wages for real work	Marketing, bookkeeping, social media

 

Example:
A real estate agent pays their 8-year-old $3,000 for appearing in family-friendly neighborhood ads and another $5,000 in wages for office tasks.
Total deductible compensation: $8,000.

 

Age-Appropriate Work That Passes IRS Scrutiny

Ages 7–10

• Shredding, filing, or organizing
• Cleaning office space
• Modeling for marketing materials

Ages 11–14

• Social media photos and posts
• Website updates
• Customer service or data entry

Ages 15–18

• Bookkeeping and reporting
• Marketing and design
• Client communication or training staff

 

Documentation: Your Audit Shield

Keep impeccable records. Your documentation should include:

For Wages:

• Written job description and employment agreement
• Time logs (Toggl or similar)
• Regular pay schedule (not lump sum)
• Separate bank account for the child
• Year-end W-2 (not 1099)

For Image Rights:

• Signed model release
• Proof of marketing use
• Comparable rate research
• Payment records and receipts

 

Avoid These IRS Red Flags

• “Ghost Employee” – paying kids who don’t actually work.
• Overcompensation – $30K for “social media strategy” won’t fly.
• Lump-sum December payments – looks like a disguised gift.
• Work during school hours – immediate audit trigger.

 

Bonus: The Roth IRA Multiplier

Once your child earns legitimate income, they can contribute to a Roth IRA(up to $7,000 in 2025).

 

A 14-year-old contributing $6,000 per year until 18 could retire with over $500,000 tax-free —even if they never add another penny. Parents can even gift the contribution amount, as long as the child has earned income.

 

Implementation Roadmap

Phase 1 – Setup

1. Identify legitimate work or marketing use.
2. Determine reasonable pay.
3. Create agreements.
4. Set up payroll and child bank account.

Phase 2 – Ongoing

1. Track time and payments.
2. Keep proof of work or marketing use.
3. File W-2s annually.

Phase 3 – Optimize

1. Open Roth IRAs.
2. Adjust duties and pay as children grow.
3. Review annually with your CPA.

 

Business Structure Considerations

Entity Type	Payroll Tax Exemption for Under 18	Notes
Sole Prop / SMLLC	✅	Full exemption
S-Corp	❌	Income-shifting still helps
Partnership (spouses)	✅	Allowed if both partners are parents

 

When It’s Not Worth It

Skip this strategy if:

- You’re in a low tax bracket.
- You can’t maintain proper documentation.
- The compliance burden outweighs the savings.

 

The Bottom Line

Hiring your kids—whether for real work or image rights—is one of the most powerful, legal, and rewarding tax strategies available to family business owners. It builds wealth and wisdom at the same time.

 

At Desert Rose Tax & Accounting, we’ve helped dozens of Arizona families implement this strategy correctly. We can help you:

• Design compliant pay structures.
• Draft documentation.
• Coordinate payroll and Roth IRA setup.

📞 Call 520-747-4964 or visit www.desertrosetax.com to start your family wealth plan today.

 

Edward Ethington, CPA, MBA
Desert Rose Tax & Accounting
Building Family Wealth Through Smart Tax Planning
520-747-4964

 

This post is for educational purposes only and should not be considered legal or tax advice. Always consult with a qualified professional before implementing employment arrangements with family members.