How to pay your kids tax-free as employees

If you have a large family like we do, as well as own your own business... then this info is for you.

Having four kids is quite expensive. Between additional educational items like tutoring, as well as all the sports and all the other regular necessities, things add up really quickly. Rather than bringing home more money from your business to the parent in the form of income, make your kids an employee and let them pay for the things that they need themselves.

So how much money can each child make from your business without paying any federal income tax? Well in 2023 that amount was $13,850 and it was raised to $14,600 per year tax-free in 2024.

Yes, you can pay your child up to $14,600 per year and that will all be tax-free, plus your buisness gets to deduct your child's wages as a business expense. Therefore, in our home our children are on payroll. This isn’t just free money though. They do need to work for it. They do things like organize the tools, help me file paperwork, run errands, (that applies to our drivers) website and social media tasks and other tasks that frankly we don’t really want to do and would need to pay someone to do. Note: with four kids we do not max out they’re earning capacity for each year. But we do try to allocate as much as we can for the things that they will need to pay for themselves.

Each month our kids get a paycheck on the 1st and 15th. This makes them accountable for how they spend their money. They want to go out and blow money on lunch which they could have free at home or random additional expenses, well that’s on them. When their money is out it’s out. They also must pay for their own sports and educational expenses like tutoring. Yes, I would have to pay for that anyways, but by paying them they are earning that money with that tax-free benefit. The money is being spent on them therefore they can pay it themselves.

So how does this work for kids that are pretty young? I have a bank account for them in their name, but I do not give my daughter that is 10 years old a debit card. However, if she wants to play soccer, that expense comes out of her earned money.

So what kind of business do you need?  Well, really anything business where your kids can help you out and you have a corporation or LLC to pay them.

There are so many advantages to doing this. Not only the tax advantage of each child getting up to $14,600 a year tax-free, but this all allows the parent to have to take home less and your child learns the lesson on how quick money can go if they do not plan ahead. This is a great way to teach your teenagers how to budget their money. Just like the world, when it’s gone, it’s gone. It’s a bummer they didn’t plan ahead and they don’t have enough gas money for the next few days. I guess they will have to rely on mom for a ride. Trust me once your kid has the freedom of a car but they can’t put gas in it, that’s a wake-up call in budgeting.

Tip for this method. I do not give my kids paychecks for this full amount and rely on them to save for college. My kids all have 529 investment plans for their future college expenses, but those accounts are drafted automatically from the company into their account so that they don’t ever mess up with the funds that are allocated to save for their future.

All of this isn’t rocket science. However, it does take a bit of time to figure out. I had help from my financial planner, but you could certainly manage to do this without one. It’s just a matter of again budgeting and also setting up bank accounts that automatically draft. Once you take all the labor out of it and automate things, it makes it much more simple. I strongly encourage you to take the time to research this with your tax accountant and your financial planner if you have one. Just let them know what your plan is and they will help walk you through it. It’s a huge financial advantage to figure this out. Don’t put it off! I might’ve been there and I do know that.

Xo,

Mama