How to LEGALLY Pay Your Kids Through Your Business (And What the IRS Thinks)

Why It Matters

Employing children through a proper sole‑proprietorship structure creates deductible wages, tax‑free Roth IRA space, and significant payroll tax savings, enhancing family wealth while remaining IRS‑compliant.

Key Takeaways

• Pay children via sole proprietorship to claim tax deduction.
• Must pay reasonable market wage, typically minimum wage.
• Children’s earnings under standard deduction avoid filing and payroll taxes.
• Use W‑2, not 1099, to keep FICA exemption.
• Earned income enables Roth IRA contributions for kids.

Summary

The Taxmart REI podcast explains how parents can legally employ their children in a family‑run real‑estate business to generate earned income and capture tax benefits. By hiring kids through a sole proprietorship or husband‑and‑wife partnership, owners can deduct the wages as a business expense while keeping the children’s earnings below the standard deduction threshold.

Key points include using a reasonable, market‑based wage—usually the minimum wage—for tasks such as social‑media posting, cleaning, filing, or light physical labor. The arrangement must be documented with a W‑2; issuing a 1099 would trigger self‑employment taxes and jeopardize the strategy. Because the children are employed by their parents, they are exempt from Social Security, Medicare, and federal payroll taxes, and they may avoid filing a return if earnings stay under $16,000.

The hosts cite examples ranging from an eight‑year‑old assisting with property clean‑up to teenagers handling video editing or AI‑driven content creation. They stress that the wage must be justifiable—paying a child $15,000 for a single photo shoot would raise IRS red flags. Consulting a CPA ensures compliance with both federal and state rules, especially in the few states that still require payroll tax registration.

If executed correctly, the strategy accelerates wealth building by allowing children to contribute to Roth IRAs, where growth is tax‑free. It also provides immediate cash‑flow relief for the business through deductible wages, making it a compelling tool for real‑estate investors and small‑business owners seeking to reduce their overall tax burden.

Original Description

Can you legally pay your children through your business and use it to build tax-free wealth for their future?

In this episode of the Tax Smart REI Podcast, Thomas Castelli and Nate Sosa break down one of the most powerful family tax strategies available to business owners and real estate investors.

You’ll learn:

- How to legally pay your kids through your business

- The entity structures required to avoid payroll taxes

- What jobs children can reasonably perform

- How much you can realistically pay them

- Roth IRA strategies for children

- Trump Accounts vs. 529 Plans

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0:00 – How Paying Your Kids Can Save Taxes

4:37 – What Jobs Can Your Children Legitimately Do?

5:41 – Using AI & Digital Skills in the Family Business

6:05 – Physical Labor Jobs Kids Can Perform

6:52 – Why Paying Kids as “Models” Can Be Risky

7:36 – How Much Should You Pay Your Child?

8:40 – Minimum Wage & Reasonable Compensation Rules

9:51 – Best Entity Structures for This Strategy

10:33 – Why S Corps & 1099s Can Ruin the Strategy

11:06 – Payroll Tax Savings Explained

11:47 – W-2 Filing Requirements for Children

13:19 – Using a Roth IRA for Your Kids

13:55 – Roth IRA Withdrawal Rules & Flexibility

15:01 – The Power of Starting Retirement Savings Early

15:50 – Why You Shouldn’t Be Too Aggressive

16:24 – Combining the Strategy With Roth IRAs

16:49 – Reviewing a Viral Tax Strategy Video

17:51 – What the Viral Advice Gets Wrong

18:22 – Why Paying Kids $16K Can Be Hard to Defend

20:28 – Why Household Chores Don’t Count

21:21 – How to Determine a Reasonable Wage

21:53 – Introduction to Trump Accounts

22:28 – Why Trump Accounts Matter for Families

22:57 – How Trump Accounts Work

23:35 – The $1,000 Government Contribution Explained

24:03 – Using Roth IRAs & Trump Accounts Together

24:57 – Trump Accounts vs. 529 Plans

26:11 – Extra Contributions & Enrollment Details

26:49 – When a 529 Plan Makes More Sense

28:03 – What Happens to Trump Accounts at Age 18

28:59 – Final Thoughts on Building Wealth for Your Kids

29:45 – Podcast Disclaimer

The Tax Smart Real Estate Investors podcast is for general information purposes only and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Information on the podcast may not constitute the most up-to-date legal or other information. No reader, user, or listener of this podcast should act or refrain from acting on the basis of information on this podcast without first seeking legal and tax advice from counsel in the relevant jurisdiction. Only your individual attorney and tax advisor can provide assurances that the information contained herein – and your interpretation of it – is applicable or appropriate to your particular situation. Use of, and access to, this podcast or any of the links or resources contained or mentioned within the podcast show and show notes do not create a relationship between the reader, user, or listener and podcast hosts, contributors, or guests. Any mention of third-party vendors, products, or services does not constitute an endorsement or recommendation. You should conduct your own due diligence before engaging with any vendor.