If you’re considering hiring your child in your business, you’ve probably heard some version of this financial planning tip: Put your kids to work, pay them through the business, and use their earnings to fund a Roth IRA.
It can be a great strategy. But it’s not quite as simple as putting your 10-year-old on the payroll, moving $7,500 into a Roth IRA and calling it a day.
Your child needs to perform legitimate work. Their compensation needs to be reasonable for the work they’re actually doing. You need to determine whether they’re really an employee or an independent contractor. There may be payroll filings and employment taxes involved. And if your child already has investment income from an UTMA, taxable account or trust, their tax situation may be more complicated than you realize.
Before hiring your child in your business, here’s what you should understand.
Hiring Your Child in Your Business Starts With a Real Job
The basic concept is legitimate: A business can employ the owner’s child just as it can employ anyone else.
But there needs to be actual work involved.
Depending on your business and your child’s age, legitimate jobs might include:
Appearing in photographs or advertising used by the business
Stuffing materials or preparing items for events
Organizing supplies or inventory
Shredding appropriate documents
Cleaning an office or business property
Performing basic administrative work
Helping with photography, video or social media
Maintaining a business property
Doing more sophisticated administrative or technology work as they get older
The job should make sense for both the business and the child’s age.
Just as importantly, the compensation needs to make sense.
If you would ordinarily pay someone $15 per hour to perform a particular task, paying your child $100 per hour simply because you’d like to put $7,500 into an IRA is difficult to justify.
Think about the strategy in this order:
Legitimate work → reasonable compensation → earned income → potential IRA contribution
Not:
Desired IRA contribution → figure out how to justify paying the child that amount.
Keeping a job description, records of hours worked, evidence of the work performed and documentation supporting the pay rate can help establish that this is a bona fide employment arrangement.
Would a Trump Account Be Easier?
If the primary reason you’re considering hiring your child is to create earned income so you can fund an IRA, it may be worth asking whether you need to create an employment arrangement at all.
A Trump Account allows family members and others to contribute up to $5,000 per year during the child’s growth period without the child having earned income. That’s less than the $7,500 IRA contribution limit for 2026, but it gets you a substantial portion of the way there without having to create and document a legitimate job, determine reasonable compensation, establish payroll or deal with the additional costs and tax filings that may come with employing your child.
The tradeoff is the tax treatment. A Trump Account grows tax-deferred, similar to a Traditional IRA, rather than providing the tax-free qualified growth available through a Roth IRA.
That doesn’t necessarily mean the money has to remain pre-tax forever. Once the Trump Account’s special childhood rules end, Traditional IRA rules generally apply, creating the potential for a future Roth conversion.
Timing may matter. For example, the child’s college years or another period of relatively low taxable income could present an opportunity to convert some or all of the account to a Roth at a relatively low tax cost — potentially even no federal income tax in some circumstances. The actual result will depend on the child’s earned income, investment and trust income, kiddie-tax status and other tax circumstances at the time.
The question to ask: If you’re primarily creating a job to get money into an IRA, is the additional $2,500 of potential annual IRA contribution worth the employment, payroll and administrative hoops — or would the simpler $5,000 Trump Account accomplish most of what you’re trying to do?
Employee or Independent Contractor? You Don’t Necessarily Get to Choose.
One common question is whether a parent can simply issue the child a 1099 instead of putting them on payroll.
Worker classification doesn’t work that way.
Whether someone is an employee or independent contractor depends on the actual working relationship, including who controls how the work is performed and the financial and business relationship between the parties.
For example, if your 14-year-old reports to your office at a time you specify, uses your equipment, performs tasks you assign and works under your supervision, that looks a lot like an employer-employee relationship.
If your 17-year-old operates a lawn-care business, owns the equipment, works for multiple customers and invoices your business for mowing its property, the facts may support independent-contractor treatment.
And there’s another catch: A legitimate independent contractor generally has self-employment income, potentially making that income subject to self-employment tax.
In other words, issuing your child a 1099 isn’t necessarily the easier or less expensive version of this strategy.
Your Business Structure Makes a Big Difference
This is one of the most overlooked pieces of the “hire your kids” strategy.
Under federal tax rules, wages paid to a child under age 18 working for a parent’s sole proprietorship — or a partnership in which every partner is a parent of the child — generally aren’t subject to Social Security and Medicare taxes.
Those wages are also generally exempt from federal unemployment tax (FUTA) while the child is under age 21.
Income-tax withholding rules still apply.
But those special payroll-tax exemptions generally disappear when the employer is a corporation, including a corporation owned by Mom or Dad.
So consider two parents who each legitimately pay their 15-year-old $5,000 for work in the business.
Parent A operates as a sole proprietor.
The child’s wages may qualify for the special exemption from Social Security, Medicare and FUTA taxes.
Parent B operates the business as an S corporation.
The corporation is the employer. The child’s wages are generally subject to the same Social Security, Medicare and unemployment tax rules that apply to other employees.
Same parent. Same child. Same $5,000 of work.
Different business structure, different payroll-tax result.
That doesn’t mean an S-corporation owner shouldn’t employ a child. It simply means the financial benefit and administrative cost should be evaluated before assuming the strategy works the same way for everyone.
Do I Actually Have to Put My Child on Payroll?
If your child is an employee, this is real employment — not simply a bookkeeping entry transferring money from your business to your child.
That can mean obtaining or using an employer identification number, completing employment paperwork, running payroll, maintaining payroll records, making required federal and state filings, and issuing a W-2.
There can also be state-specific requirements involving child labor laws, unemployment insurance, workers’ compensation and employment registration.
The administrative cost therefore matters.
If you’re already running payroll for other employees, adding your child may be relatively easy.
If you’re a one-person business that has never had an employee, establishing payroll infrastructure solely so your child can earn $1,000 or $2,000 may be more trouble and expense than you expected.
Before proceeding, ask your CPA and payroll provider:
What will it actually cost me annually to add my child as an employee?
Then compare that cost with the tax and long-term planning benefits you’re trying to create.
How Much Should I Pay My Child?
There’s no special rule saying you should pay your child enough to max out an IRA.
In fact, starting with the IRA contribution limit is arguably looking at the question backward.
For 2026, an individual can contribute up to $7,500 to Traditional and Roth IRAs combined, but contributions are also limited by the individual’s eligible compensation. A child with $3,000 of eligible compensation can’t contribute $7,500 simply because that’s the annual IRA limit.
That doesn’t mean the goal should automatically be $7,500 of wages.
If your child legitimately performs $3,000 worth of work, $3,000 may be the appropriate compensation — and potentially the appropriate maximum IRA contribution.
If your teenager genuinely performs $8,000 or $10,000 of work at a reasonable market rate, that’s a different situation.
Let the job determine the compensation, rather than allowing the desired IRA contribution to determine the job.
Does My Child Have to Put Their Actual Paycheck Into the IRA?
No.
The IRA contribution is limited by the child’s eligible compensation, but the dollars deposited into the IRA don’t have to literally be the same dollars the child received in a paycheck.
For example, assume your teenager earns $4,000 working in your business.
They might want to spend or save some of their paycheck. Mom or Dad could separately provide $4,000 that ultimately funds the child’s IRA, assuming the contribution otherwise qualifies.
This can create a nice family arrangement: Your teenager gets the experience of earning and managing money, while you effectively match their earnings with a contribution toward their very long-term future.
Roth IRA or Traditional IRA?
This is another place where the popular version of this strategy skips a step.
Your child’s earned income can potentially support a contribution to either a Traditional IRA or Roth IRA. It doesn’t automatically have to be Roth.
So why do you hear so much about Roth IRAs for kids?
Because Roth contributions don’t provide a current income-tax deduction. In exchange, qualified withdrawals can eventually be tax-free.
That’s particularly compelling when someone is paying little or no income tax today.
A child who earns $4,000 or $5,000 and has little other income may receive little benefit from taking a Traditional IRA deduction. Paying little or no federal income tax today in exchange for potentially allowing those dollars to compound tax-free for decades can make the Roth especially attractive.
But there’s an important asterisk:
Don’t Automatically Assume Your Child Is a “Zero-Tax” Taxpayer
Some children already have significant assets.
Maybe Grandma has been funding an UTMA since they were born. Maybe your child is the beneficiary of a trust. Perhaps they inherited investments or have another taxable account generating dividends, interest and capital gains.
Now the tax picture changes.
The wages your child earns from working are earned income. Interest, dividends, capital gains and certain taxable trust distributions are generally unearned income.
Children with enough unearned income can be subject to the “kiddie tax,” under which some of that unearned income may be taxed using the parents’ tax rate.
So don’t look only at a $5,000 paycheck and automatically conclude:
“My child doesn’t pay taxes, so Roth is obviously better.”
Look at the child’s entire tax situation.
A Traditional IRA contribution doesn’t simply erase investment income or make the kiddie tax disappear. But when a child already has meaningful taxable investment income, there may be more value to a current deduction than there would be for a child whose only income is a relatively small paycheck.
That’s a situation where it makes sense to have your CPA compare the actual tax result of a Traditional versus Roth contribution rather than automatically defaulting to Roth.
Wait — Isn’t My Child’s Investment Income Reported on My Tax Return?
Sometimes.
This is one reason the kiddie-tax rules can be confusing.
Your child’s income is still your child’s income. But under certain circumstances, parents can elect to report a child’s qualifying interest, dividends and capital-gain distributions on their own tax return rather than having the child file a separate return.
That’s why some parents with children who own UTMAs or other investment accounts may look at their own Form 1040 and see their child’s investment income reflected there.
The calculation also provides a certain amount of shelter before additional unearned income becomes subject to tax. For 2026, the inflation-adjusted amount used in the kiddie-tax calculation is $1,350.
Once you add wages from working in the family business, however, the child’s tax situation can change. The special parent election has specific eligibility requirements, including requirements surrounding the types of income the child receives.
So a strategy intended to create IRA eligibility can also create something decidedly less exciting:
A separate tax return for your child.
That’s not necessarily a reason not to do it. It’s simply another administrative and tax-planning cost to consider.
What About Money Coming From a Trust?
This deserves particular care.
Not all trust income is taxed the same way, and not all trust investment earnings necessarily become taxable income to the child.
A trust may retain income and pay the associated tax itself. In other circumstances, taxable income may be distributed or carried out to a beneficiary.
So if your child is the beneficiary of a trust, don’t assume that the trust’s investment return is equivalent to an UTMA account generating dividends and capital gains directly in the child’s name.
Look at the child’s tax forms — and ideally talk to the CPA preparing the trust and individual returns — before deciding how additional earned income and an IRA contribution fit into the picture.
Is Hiring Your Child Actually Worth It?
Maybe. But the answer shouldn’t begin and end with the tax deduction.
Consider all the pieces:
- Is there legitimate work for your child to perform?
- Is the amount you plan to pay reasonable for that work?
- Is your child an employee or legitimately an independent contractor?
- How is your business structured?
- Will the wages be subject to Social Security, Medicare or unemployment taxes?
- What will payroll and tax preparation cost?
- Does your child already have investment or trust income?
- Will the child now need a separate tax return?
- Does a Roth or Traditional IRA make more sense given the child’s complete tax picture?
And finally:
Is the financial benefit large enough to justify the additional administration?
For a sole proprietor already running payroll who has a teenager performing thousands of dollars of legitimate work every year, the answer may look very different than it does for a parent establishing payroll from scratch to pay a young child a few hundred dollars.
The Bigger Opportunity: Starting the Financial Conversation Early
The tax strategy gets most of the attention, but there’s another potential benefit to employing your child: It creates an opportunity to teach them what earning money actually looks like.
They can learn to read a paycheck, understand taxes, manage a bank account, decide how much to spend and save, and see a portion of their earnings invested for the future.
And yes, starting an IRA at 12, 15 or 17 gives those dollars an extraordinary amount of time to compound.
But the best strategy isn’t to manufacture earned income simply to open an IRA.
It’s to take real work your child can legitimately perform, compensate them appropriately, follow the employment and tax rules, and then make a thoughtful decision about what to do with the money they’ve earned.
For families who already have UTMAs, trusts or other assets in a child’s name, coordinating that decision with the child’s broader tax picture becomes even more important.
Tax and employment rules can vary based on business structure, worker classification, the child’s age and state law. This article is intended for general educational purposes and isn’t tax or legal advice. Consult your CPA, attorney and/or payroll professional regarding your particular circumstances.
