What if the IRS could help you pay your kids, lower your taxes, and build long-term family wealth all at the same time?

With Family Payroll, you can pay your loved ones through your business and turn those payments into tax savings and generational wealth.

This strategy turns your household into a wealth-building engine by paying your children or spouse a legitimate wage for real work in your business. The result is income shifting, tax savings, and long-term financial leverage that is fully IRS-approved.

Let’s break it down.

The Basics: What Is Family Payroll?

Family payroll is a tax strategy where you employ your children or spouse in your business and pay them a reasonable wage for legitimate services they perform. It’s especially powerful for those who:

·      Own a sole proprietorship or an LLC taxed as a sole proprietorship

·      Are real estate investors managing rentals or short-term stays

·      Run family-owned businesses, side hustles, or content creation brands

Instead of you paying 37 percent in tax on your income, youshift some income to your kids, who may pay zero to 10 percent in tax or noneat all.

It’s legal. It’s smart. And it’s underused.

Why It Works: IRS Rules and Real Money Movement

·      When structured correctly, paying your kids allows you to deduct their wages as a business expense

·      Avoid payroll taxes on their wages if they are under 18 and employed by a sole proprietorship or a parent-owned LLC

·      Shift income from your high tax bracket to their low or zero bracket

·      Fund Roth IRAs or custodial investment accounts for long-term wealth

For 2025, the standard deduction is $15,750 for single filers and married persons filing joint, $31,500. That means your child can earn up to that amount completely federal income tax free, while you deduct it from your business.

Example: The $28,000 Tax Swing

Imagine you pay your 14-year-old $14,000 per year to help with real tasks like organizing mailers, creating social media content, or placing real estate signage. That $14,000

·      Reduce your taxable business income by $14,000

·      Saves you roughly $5,180 if you’re in a 37 percent tax bracket

·      It is taxed at zero percent to your child because it falls under the standard deduction

If you have multiple kids, the tax savings increase significantly. Ten thousand to twenty thousand dollars in annual savings is realistic. Beyond the savings, you’re teaching your children financial literacy and building their net worth early.

What Kind of Work Qualifies?

The IRS expects the work to be real and age appropriate.

For younger children, this might include filing papers, shredding documents, cleaning up the office, or stuffing envelopes.

As they get older, they might help with graphic design onCanva, assist with short-term rental operations, run errands, manage yourbusiness’s social media accounts, or help with real estate signage andshowings.

The key is to document everything. Keep job descriptions,track hours, set reasonable pay rates, and treat them like any other employee.

What About Spouse Payroll?

Paying your spouse can unlock a new level of tax strategy. Here’s how it helps

·      Enable retirement contributions to a Solo 401(k), SEP IRA, or Defined Benefit Plan

·      Grants access to tax-free fringe benefits such as medical reimbursements through an HRA, travel deductions, or employer-paid health insurance

·      Provides income shifting opportunities if your spouse is in a lower tax bracket

This strategy is especially useful in S Corporations, C Corporations, or LLCs taxed as corporations where long-term wealth planning isa priority.

Key Tax Benefits of the Strategy

·      Lowers your overall household tax bill

·      Build long-term retirement and investment accounts

·      Create a legitimate record of earned income for your children, which helps with credit, student loans, and Roth IRA eligibility

·      Help your family learn how to earn, budget, and invest at an early age

Common Mistakes to Avoid

·      Not tracking hours or work performed

·      Paying your kids without a written job description

·      Forgetting to issue W-2s or using1099s, which is incorrect for children

·      Paying more than a reasonable market wage for the task

·      Failing to keep proper records incase of an IRS audit

This is a powerful strategy, but it must be executed correctly to avoid scrutiny.

Action Steps to Get Started

1. Confirm your business structure allows for employing family members
2. Write up job descriptions and define tasks for each person you plan to hire
3. Set up a compliant payroll system
4. Track hours and maintain documentation for IRS compliance
5. Work with a CPA who understands the specific rules for family payroll

Final Thoughts: It’s More Than a Tax Hack

Family payroll is not just about reducing this year’s tax bill. It is about building generational wealth, creating financial literacy at home, and using your business as a tool to fund your family’s future.

Learn how smart tax planning works in real life in our CaseStudy: How We Saved an Account Executive $55,000 on a $300,000 Income.

FAQs

Q1: Can I pay my kids in cash?
No. Payments must go through a legitimate payroll system with W-2s and records.

Q2: How young can my child start working?
There’s no minimum age for family payroll, but the work must be legitimate and age-appropriate (e.g., stuffing envelopes at age 7 vs. social media management at 14).

Q3: Do I have to with hold payroll taxes for my kids?
If you’re a sole proprietorship or parent-owned LLC, kids under 18 are exempt from Social Security and Medicare taxes. Other entities (like S Corps) must with hold.

Q4: Can my child contribute to a Roth IRA?
Yes! As long as they have earned income from wages, they can contribute up to $7,000 in 2025.

Q5: What happens if I overpay my child?
Paying above market value can trigger IRS scrutiny. Always set reasonable wages for the task performed.

Q6: Can I hire my spouse too?
Yes. Spouse payroll unlocks retirement contributions, fringe benefits, and tax planning advantages.

Want Help Setting This Up?

Reach out to INVESTOR FRIENDLY CPA® for expert guidance on turning your family into a tax-smart, wealth-building team. We’ll help you structure it the right way, so you save money, stay compliant, and build generational wealth.

Our Services: Customized family payroll plans, IRS-compliant job descriptions and documentation, payroll setup for children and spouses, and long-term wealth strategies for your business.

Toll-Free:1-800-522-6091
Website: www.investorfriendlycpa.com
Schedule a Strategy Call Today and take the first step toward smarter tax planning.

Case Study: See how a high-earning physician and REPS-qualified spouse legally saved $53,000 in one year using REPS, cost-seg bonus depreciation, and a cleanly timed Backdoor Roth, so you can spot the moves you’re likely missing.