Shift Income to Save on Taxes with Child Wages

If you’re a business owner with children, you may be missing out on a valuable—and IRS-approved—opportunity to shift taxable income to a lower tax bracket. By employing your child in your business, you can reduce your overall tax liability and teach them the value of earning money at the same time.

Why It Works: Two Key Benefits

1. Standard Deduction Advantage
   In 2025, a dependent single person can earn up to $15,000 in earned income without owing federal income tax, thanks to the IRS standard deduction. That means your child could work for your business and pay zero federal income tax—while your business gets a deduction.

2. FICA Tax Savings
   Children under age 18 are not subject to FICA (Social Security and Medicare taxes) or federal unemployment tax if they work for a self-employed parent. That’s a 15.3% savings on payroll taxes—both for you and your child.

The Rules: Keep It Legit

To take advantage of this opportunity, your child must be treated like any other employee:

• Fill out and maintain a W-4 and I-9

• Pay a reasonable wage for actual work performed

• Track hours and tasks with supporting records

• Pay wages timely and in compliance with labor laws

• File a W-2 at year-end

• Comply with applicable state labor laws, including worker’s compensation and unemployment insurance (where required)

Who Qualifies for the FICA Exemption?

To avoid paying FICA (7.65% for the employer and 7.65% for the employee), the business must be:

• A sole proprietorship owned by the parent

• A single-member LLC taxed as a sole proprietorship

• A partnership where both partners are the child’s parents

Important Note:
An S corporation, even if 100% parent-owned, does not qualify for the FICA exemption. However, it can still shift income to the child’s lower tax bracket—just without the payroll tax benefit.

Bottom Line: Income Shifting Strategy

Paying your child a fair wage through your business can:

• Lower your taxable income

• Avoid FICA taxes (when applicable)

• Provide your child with valuable work experience

• Possibly fund a Roth IRA or college savings with tax-free income

Want to explore this strategy further?
Contact DrillDown Solution to learn how to make this tax-smart move work for your family and your business: Contact Us – Drilldown Solution – ACT