Tax Benefits of Hiring Your Child
Does your child have odd jobs, work in entertainment, or even work for you?
If so, there are tax advantages you may not have considered. A child’s income can be invested in a Roth IRA, allowing them to withdraw both principal and interest tax-free for college or retirement. Additionally, if your child works for you, you are not required to withhold Social Security or Medicare taxes on their wages.
The Limits on Roth IRA Contributions
While the idea sounds great, it’s important to keep in mind that there are limits. For 2025, the maximum contribution to a Roth IRA is $6,500 per child per year. The child must have earned income to contribute, and the amount they can contribute is based on their earnings, up to the limit. Additionally, child labor laws prohibit jobs that interfere with schooling. This article is focused on children working modest hours, not child stars with private nurses and tutors.
Small Jobs, Big Tax Benefits
If your child is still in school and has a few odd jobs or works part-time during the summer, weekends, or after school, the income may seem modest, but it can offer tax benefits. For 2025, if your child’s earnings exceed their standard deduction of $13,850, they are required to file a tax return. However, they cannot claim an exemption for themselves, as they are still your dependent, and you claim the exemption.
If your child has tax withheld from their paycheck, they may be entitled to a refund and will likely want to file a return. However, if your child had no tax liability in the previous year and doesn’t expect one for the current year, they can avoid withholding by writing “exempt” on their W-4.
Working in the Entertainment Industry
Your child may be lucky enough to get a small job in entertainment, such as modeling, acting, or performing on stage or screen. There are specific rules in place for children in the entertainment industry. Make sure to review your state’s labor laws before moving forward.
If you live in California, Louisiana, New Mexico, or New York, you must comply with the Coogan Law. This law mandates that 15% of your child’s gross earnings must be placed into a blocked account that they can access only when they turn 18. For the remaining 85%, we recommend considering a Roth IRA contribution, so your child will have long-term financial benefits when they reach adulthood.
Additionally, labor laws restrict children from working in hazardous or immoral occupations, including certain jobs in gas stations. While some gas station tasks are permissible for 16-year-olds, others are off-limits to minors under 18. Make sure you check local laws, especially if you own a small business or gas station and want your child to gain experience in this type of work.
Tax Benefits of Hiring Your Child
Hiring your child can be a win-win situation. Your child is taxed at a lower rate than you, and you get to deduct their wages, reducing your taxable income. However, it’s important to remember that the IRS is vigilant about taxpayers who may abuse this tax strategy. To avoid any issues, ensure you are paying your child a reasonable wage for the work they perform.
If you have other employees doing similar tasks, make sure their pay is comparable. For example, hiring your child to help with administrative tasks like answering phones, filing, or printing is not only great experience for them, but it’s also a tax advantage for you. Plus, if your child is under 18, you do not need to pay FICA or Medicare taxes (a savings of 15.3%).
Stay Compliant with the IRS
The IRS has specific guidelines about hiring your child, so you need to be sure that you’re meeting all requirements. If your child is under the age of 18, FICA and Medicare taxes are not required, but you must pay the appropriate federal and state income tax.
Remember that a reasonable wage means the pay should reflect the work performed, not just a way to transfer income to a lower tax bracket. It’s important to document the work your child performs, and the wages you pay them, to avoid any issues with the IRS.
Special Considerations for High-Income Earners
If your child receives substantial income from entertainment work or other sources, we recommend consulting with a tax professional. Complex rules may apply to entertainment income, including special tax deductions and benefits related to child performers. At Velin & Associates, we provide customized tax advice tailored to your specific situation.
Contact Velin & Associates for Help Year-Round
If you need assistance understanding your child’s tax situation or have unique circumstances, such as entertainment income, don’t hesitate to reach out. We offer year-round guidance and are here to help you navigate the complexities of tax law.
Contact us today:
Phone: 323-902-1000
Email: dmitriy@losangelescpa.org
Website: www.losangelescpa.org