Employ Your Kid AND Save for Their Future — 2025 Update

Unless you’ve been living in a cave for the past couple decades, you know the cost of education isn’t slowing down. The way to tackle a big goal is still the same: break it into bite‑size pieces and take consistent action. In this post, those “pieces” are (1) paying your child a reasonable wage for real work in your business and (2) funneling part of that earned income into a Roth IRA—while coordinating with a 529 plan when it makes sense.

Below is the 2025 refresh—with the key numbers, the rules that matter, and the very real pros and cons of hiring your kids. We’ve also added the documentation and benchmarking expectations we build into client files at Dark Horse CPAs (employment agreements, job descriptions, compensation analysis, and more).

Why this still works in 2025

• Wages are deductible to your business if they’re ordinary, necessary, and reasonable for services actually rendered (that “reasonable pay” language lives in the Internal Revenue Code).
• Kids can often pay little or no federal income tax on modest wages. For 2025, a child you claim as a dependent gets a standard deduction equal to the greater of $1,350 or earned income + $450, capped at the regular standard deduction for their filing status (for a single filer that cap is $15,000). Translation: if the child’s only income is wages, up to about $15,000 of wages can be sheltered by the standard deduction. State rules vary.
• Roth IRA contributions are allowed up to the child’s earned income, capped at $7,000 for 2025 (minors don’t get the 50+ catch‑up, obviously). Anyone can fund the contribution for the child; the child just has to have enough earned income. (The IRS even gives a “grandma can contribute” example.)

First things first: can your child legally work for you?

• Entity + payroll tax rules matter.
  • If your business is a sole proprietorship (including a single‑member LLC taxed as a sole prop) or a partnership where both partners are the child’s parents, wages to your child:
    • are subject to income tax withholding,
    • are not subject to Social Security/Medicare (FICA) if the child is under 18, and
    • are not subject to FUTA if the child is under 21.
  • If your business is a corporation (S or C) or a partnership with any non‑parent partner, all normal payroll taxes apply regardless of the child’s age.
• Child‑labor compliance. Federal rules restrict hazardous work and set special rules for under‑16 workers. There’s also a “parental exemption” that permits parents to employ their own child under 16 in non‑hazardous, non‑manufacturing/mining jobs—but states can be stricter, so check both.
• Worker classification. Your child is an employee, not a contractor. Use a W‑2, not a 1099. The IRS looks at control, financial arrangements, and relationship of the work—kids doing tasks under your direction are employees.

The non‑negotiables

1. Real job, real responsibilities. Write a short job description (e.g., product photos, packaging, content edits, CRM clean‑up, social scheduling, inventory counts). Avoid prohibited/hazardous duties.
2. Reasonable pay—benchmark it. Your deduction hinges on reasonableness. We benchmark hourly rates to local market comps for similar part‑time roles and document the basis (job boards, wage surveys). The Code literally allows only “a reasonable allowance for salaries…for services actually rendered.”
3. Employment paperwork. W‑4, I‑9, and payroll setup; issue a W‑2 at year‑end.
4. Timekeeping + proof of work. Timesheets, deliverables (files/photos), and payment to the child’s own account.
5. Pay frequency + method. Pay on a regular schedule through payroll like any employee.
6. Know your entity’s payroll‑tax treatment (see above).

How Dark Horse helps: We provide employment agreements, job descriptions, timesheet templates, and a compensation analysis (with third‑party data) so the file stands up to scrutiny.

“What should we pay in 2025?”

A common planning target is up to ~$15,000 of wages for the year if the child’s only income is wages—because the 2025 dependent standard‑deduction math can zero out federal income tax on that amount. (If the child also has unearned income, the kiddie‑tax rules kick in, but those apply to unearned income; wages are earned income.)

Quick Illustrations:

• Sole prop + 16‑year‑old: Pay $15,000 for bona fide work. No FICA (under 18 in a qualifying parent‑owned sole prop). No FUTA (under 21). With the dependent standard deduction, likely $0 federal income tax on the child’s return. Your business deducts the $15,000 wage expense.
• S‑Corp + 16‑year‑old: Same $15,000 wages. Normal FICA applies (roughly 7.65% employee + 7.65% employer on that wage). The child may still owe $0 federal income tax after the standard deduction, but the family bears FICA/Medicare. Your S‑Corp still gets the wage deduction. (State taxes vary.)

Bottom line: even with payroll taxes in corporate structures, the income‑tax deduction at the parents’ bracket often outweighs the family’s FICA cost—provided pay is reasonable and the job is real. We model this for you before you proceed.

Where the Roth IRA fits

• 2025 limit: $7,000 or the child’s earned income, whichever is less. A parent/grandparent can fund it on the child’s behalf.
• Why Roth for kids: No current deduction is needed (the child typically has little/no taxable income), and Roth growth is tax‑free if withdrawn in retirement as a qualified distribution. Also, contributions (not earnings) can be withdrawn anytime, tax‑ and penalty‑free, which adds flexibility in young adulthood.
• College angle: If you tap earnings before age 59½, the 10% early‑withdrawal penalty is waived for qualified higher education expenses—but the earnings are still taxable as income in that year. (Contributions remain tax‑ and penalty‑free.) Coordination is key.

529 plans still matter

• Tax‑free growth for qualified education expenses (tuition, fees, books, room/board at eligible schools; many states also offer state tax benefits on contributions).
• New(ish) twist (SECURE 2.0): Starting in 2024, certain 529 funds can be rolled to the beneficiary’s Roth IRA—lifetime max $35,000, subject to annual IRA limits, a 15‑year “seasoning” rule, and other conditions. This reduces the fear of “overfunding” a 529. We help you sequence 529 vs. Roth contributions to fit your facts

Pros & cons of hiring your kids

Pros

• Family tax arbitrage: Deduct wages at the parents’ rate; child often pays $0 federal income tax on modest wages thanks to the dependent standard‑deduction rules.
• Payroll‑tax break (in the right entity): Sole proprietors/qualifying parent‑only partnerships avoid FICA for kids under 18 and FUTA under 21.
• Kickstart compounding: Roth IRA at $7,000 in 2025 sets up decades of tax‑free growth.
• Real‑world skills + buy‑in: The non‑tax win we love to see.

Cons / watch‑outs

• Reasonable comp required: Overpaying nukes the deduction. Benchmark and document.
• Compliance effort: W‑4/I‑9, payroll, W‑2s, timekeeping, child‑labor restrictions.
• Entity limits: Corporations don’t get the under‑18 FICA break.
• Coordination with college aid/taxes: Roth earnings used for education are taxable (though penalty‑free), and timing 529 withdrawals with expenses matters

A simple game plan

1. Identify real, age‑appropriate tasks (non‑hazardous).
2. Let us benchmark pay and draft a written employment agreement with duties, rate, and schedule (we include job description + timesheets).
3. Run payroll correctly (W‑4/I‑9, W‑2; apply the entity‑specific payroll‑tax rules).
4. Fund the child’s Roth IRA (up to $7,000 or earned income). Coordinate with a 529 plan when relevant—and consider the 529→Roth option for older accounts.
5. Keep records (timesheets, samples of work, payment trail, compensation comparables).

How Dark Horse CPAs helps

• Employment agreements tailored for minor employees (with duty lists and safety carve‑outs).
• Compensation analysis with market benchmarks to substantiate reasonable pay.
• Payroll setup and entity‑specific tax treatment (yes, the sole‑prop vs. S‑Corp rules), plus W‑4/I‑9/W‑2 workflows.
• Roth IRA and 529 coordination—including education on Roth ordering/penalty rules and the 529→Roth rollover provisions.

Whatever your situation, we’ll craft a practical, defensible plan to get dollars out of your return and into your kid’s future.

About Dark Horse CPAs

Dark Horse CPAs provides integrated tax, accounting, and CFO services to small businesses and individuals across the U.S. The firm was founded to save small businesses (and their owners) from subpar accounting and tax services and subpar client experiences. These small businesses are Dark Horses among their larger and more well‑known competition. Being a Dark Horse CPA means advocating for small businesses by bringing them the tax strategies and accounting insights previously reserved for big business.

Disclosures: This is general information, not tax advice. Federal and state rules change and your facts matter. The 2025 figures cited above come from current IRS/DOL guidance (standard deduction and dependent rules, payroll‑tax treatment for family employees, IRA limits, and child‑labor limits). See sources: IRS Rev. Proc. 2024‑40 (standard deduction & dependent formula), IRS “Family employees,” IRS IRA limits, IRS/DOL child‑labor resources, IRS Roth distribution/penalty guidance, and IRS 529 Q&As/SECURE 2.0 updates.