In this instructional video, tax attorney and CPA Mark J. Kohler explains how business owners can legally employ their children to lower family taxes while teaching entrepreneurship. He outlines the tax advantages for children under 18—no federal income tax on the first $15,000 of earned income, exemption from payroll taxes, and a deductible business expense for the employer. Kohler stresses the need for legitimate, age‑appropriate work and proper documentation, recommending a perfunctory W‑2 (with zero payroll tax boxes) rather than a 1099. He shows how the earned income can be used to fund Roth IRAs, Coverdell accounts, or even a solo 401(k). For children 18 and older, he differentiates between employee treatment (W‑2 with payroll tax withholding) and subcontractor treatment (1099), and suggests placing them on a corporate board to justify travel and meal deductions. Throughout, Kohler emphasizes the dual benefit of tax savings and financial education, and offers his law firm’s services for compliance and structuring.
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Do you know one of the most powerful and legal ways to lower your taxes and teach your kids entrepreneurship at the same time? It's paying your kids through your business. That's right. Instead of giving them money after taxes to pay for music lessons, sports, school clothes, etc. You can actually move that income, shift it into their lower tax bracket or no tax bracket at all, and turn everyday support into a business write off legally. My name is Mark J. Kohler, tax attorney, CPA, small business owner and parent myself for over 30 years. And in this video, I'll walk you through how to pay your kids and your business the right way, what the IRS allows, and how this strategy can save your family thousands every year. Let's break it down now. Why does paying your kids as a strategy actually work? And let's focus on those kids under age 18. So first, they don't pay federal taxes on the first $15,000 they earn. Neither do you or I. On our first $15,000, we have what's called the standard deduction. So in 2025, we don't pay any federal taxes on that first $15,000. So for example, if your kids go out and work at McDonald's or work, have that same standard deduction and you can still claim them as a dependent on your tax return and take the child tax credit, but when it comes to earned income, they don't pay taxes on that first $15,000. Now second, if you have a small business and you pay them for legitimate services in the business, you get a tax deduction. So what we want to do is bring together the magic of your kids having earned income and you taking a legitimate deduction in the business. And next, when you pay your kids under age 18, you don't even have to withhold payroll taxes, FICA, Self Employment Tax, SUTA, FUTA, all of those Medicare, Social Security taxes you don't have to withhold when you're paying your own children and they're under age 18, you don't issue a W2, you don't issue a 1099, but you're allowed a tax deduction when they work in the business. And again, they can exclude up to $15,000 of taxable income on their federal return. Okay, now let's also talk about some of the other rules you need to be aware of. We've got to talk about legitimate work in the business and age appropriateness. So if a kid's 5 or 6 years old, they might be shredding PA or stuffing envelopes or cleaning the home office, but as they get older, as teenagers, they might be playing a more significant role at the office or out on work sites, or helping with social media or sales or who knows what. But the point is, we've got to be able to justify their wages and the amount they're earning based on their age and the work completed. Now, could you pay them more than $15,000? Sure. Could you just pay them a couple thousand dollars? Fine. It depends on the child, your business and what they're doing. But let's make sure we are not abusing the system. Let's now documentation. I explained you don't need to issue a W2, but you might want to just to document the transaction, but it's not required. And definitely you do not want to give them a 1099. A 1099 is going to create a ripple effect of other problems for them. But issuing a W2 with box one of how much they earn and then zeros and box three and five is very, very important because they're not subject to FICA or payroll taxes when they're your own child under age 18. So really the W2 is just perfunctory. It's not required. But you might want to do it because guess what, One of the other strategies is taking that earned income that you're paying them and contributing to their Roth ira. So when they have earned income, you might want to document it with the W2 just to help open those IRA accounts. Now what are the big benefits of this? You're getting a tax write off. Your kids are not paying taxes with that money. And hopefully, just hopefully, you're teaching them about finances, entrepreneurship, a job well done, and teaching them how to participate and help in the family business. Way too many families don't talk about money, talk about business and give their kids legitimate jobs to learn about work ethic and even entrepreneurship. This is a perfect opportunity to build that experience for them and in your business and also get some help. And don't forget that tax write off. Now let's talk about those kids that are 18 and older. We're going to use an entirely different strategy and bring in another bonus for your family. First, when you pay your kids that are 18 and older, you do have to withhold those payroll taxes if you issue a W2. We don't want to issue a W2 and have to withhold Suda, Fuda, Fica, Social Security and Medicare unless we have to. So if your kids that are 18 or older are working alongside your other rank and file employees and they look like an employee, act like an employee or paid like an employee, then issue them a W2. You'll still get the write off. And again, they don't pay federal taxes on the first 15 grand. It works fine, but the real magic is if you can pay them as a subcontractor, this is when a 1099 really does work. So if those kids 18 and older are working intermittently with the business, home from college or in the summer, or just working outside of the home and helping with the business from time to time, if they act like a subcontractor and are treated like a subcontractor, then you can 1099 them. So you're getting a tax write off top line for what you pay them as a vendor. Then they're going to claim that income for their own small business and take another round of write offs with their tax return because it's now their small business. So that opportunity to teach them entrepreneurship even becomes more relevant. Now here's the bonus. With those kids 18 and older, we want them serving on your board of directors, your board of advisors. If you have an LLC or corporation, those structures of having a company board are a perfect fit for your spouse, yourself and your adult children. Let's get them serving on that board where they can now take an annual trip with you and have a legitimate board meeting. And we can write off travel, dining and other expenses related to that role of them on your board. Bottom line, there is so much opportunity to teach your kids about business and money and finances as well as get a tax write off and shift income oftentimes into a non taxable structure. You're going to get these kids money anyway. You might be helping them out financially because you're just help them adult and launch. Well, let's take a write off along the way. That's the beauty of integrating kids into your business. Now before we end, I want to come back to that retirement account for kids that I mentioned a little earlier. Whether your kids are under age 18 or over age 18, we want to start teaching them about saving, investing and building their retirement accounts. When you're paying your kids in your business, this is a great opportunity to fund their Roth IRAs or or even their college savings accounts like a Coverdell IRA or educational ira. We can even get them involved in your own solo 401k for your business. There's so much opportunity here to teach your kids about building their wealth, their future and getting a tax deduction to do it. You may even see some other videos of mine on building a million dollar Roth ira. Please make sure you check those out and share them with your children at your annual board meeting. Thanks for watching. Paying your kids through your business isn't just smart tax planning. It's one of the best ways to pass on financial and entrepreneurial values to the next generation. If you do it right, you're saving on taxes, they're saving on taxes, they're gaining valuable work experience, and your family grows together, bonds together and builds wealth together. If you'd like help setting this up correctly and making sure you're in compliance with all the structuring and rules to pull this off, please reach out to my law firm, KQS Lawyers. At the link below, we have what's called a comprehensive consultation where we'll look at your overall structure, your personal tax plan and estate plan, and integrate your kids into the family in the proper way. We'd love to help you build a strategy that works for your business and your family. Finally, don't forget to like this video and subscribe for more tax and legal strategies that will save you money and protect your wealth. I'm Mark Kohler and I'll see you in the next one.
