Most California business owners have heard you can put your kids on payroll and shrink your tax bill, but very few are doing it correctly. Some are scared it will trigger an audit. Others are quietly doing it in ways that would fall apart the moment an IRS agent asks for records.

Used correctly, the hire your kids tax strategy California offers is one of the cleanest ways to move money from your high tax bracket into your child’s near zero tax bracket while legitimately helping your business.

Quick Answer

For the 2025 tax year, a California business owner can generally pay a child for real work in the business, deduct those wages, and often have the child pay little or no federal income tax on that money. When structured properly, those wages are ordinary business expenses under IRS Publication 535, and in some family businesses, they are also exempt from certain payroll taxes described in IRS Publication 15. The key is paying a reasonable wage, documenting the work, and following both IRS and California labor rules.

How the Hire Your Kids Strategy Actually Saves Tax

Imagine you own an LLC taxed as a sole proprietorship in California and you net $250,000 per year. Every extra dollar that stays in your name gets hit with federal income tax, California income tax, and often self employment tax. Now imagine shifting $15,000 of that income to your 15 year old who helps with social media, filing, and basic admin work.

Here is what happens in a simple scenario for 2025 numbers:

• You pay your child $15,000 in W 2 wages.
• Your business profit is now $235,000 instead of $250,000, so you deduct $15,000.
• If your combined marginal rate is roughly 35 percent federal plus California, that $15,000 deduction can easily reduce your family’s tax bill by about $5,000.
• Your child files a simple tax return. With the standard deduction for a single filer (over $14,000 for 2025) there may be little or no federal income tax on that $15,000.

Net result Your household has moved $15,000 into your child’s name and possibly saved around $5,000 in tax, while still keeping the money inside the family.

If you are an LLC or S Corp owner weighing whether to do this, it is the kind of move many business owners use once they understand the rules and put real payroll systems in place.

Why the Rules Favor Family Businesses

When a parent employs their own child in an unincorporated business, the IRS offers special payroll tax breaks that do not exist for unrelated employees. According to IRS Publication 15 and IRS Publication 929:

• Wages paid to a child under age 18 for work in a parent’s sole proprietorship or a partnership where both partners are the child’s parents are generally exempt from Social Security and Medicare taxes.
• Wages paid to a child under age 21 in that same type of business are generally exempt from Federal Unemployment Tax Act (FUTA) tax.

If you are running your business as an S Corporation or C Corporation, those specific exemptions do not apply. You can still hire your child and get the deduction, but FICA and FUTA taxes usually apply just as they do for any employee.

California Specific Considerations

California allows you to deduct wages you pay to your children as long as they are ordinary and necessary business expenses, just like the federal rules. But the state also has strict child labor, minimum wage, and work permit requirements that you cannot ignore.

• Most working minors in California must have a work permit from their school district, even when employed by a parent’s business.
• They must be paid at least California minimum wage, which may be higher than the federal rate and can vary for certain localities.
• Hours and types of work are limited for minors, especially during the school year.

This is where a coordinated tax planning and payroll setup becomes important, so you are not creating state level problems while solving a federal tax problem.

KDA Case Study: California LLC Owner Puts Two Teens on Payroll

Marcus owns a marketing LLC in Los Angeles that nets about $320,000 per year. His two teenagers, ages 14 and 16, were already helping with social media content, basic video editing, and organizing digital files. None of that work was being paid. All of Marcus’s profit was taxed at his high combined federal and California marginal rate.

Working with KDA, Marcus restructured his operations as a sole proprietorship for one division of the business that handled content production. Under that entity, he formally hired both kids. They obtained California work permits, signed simple employment agreements, and started tracking hours on a time sheet app. The 14 year old averaged 8 to 10 hours per week at 18 per hour. The 16 year old averaged 12 to 15 hours per week at 20 per hour, reflecting more advanced editing tasks. Across the year, total wages paid to the kids came out to 32,000.

Because this portion of the business was a qualifying family owned unincorporated entity, KDA structured the payroll so that these wages were exempt from federal Social Security and Medicare taxes and from FUTA under the rules outlined in IRS Publication 15. The 32,000 reduced the business profit dollar for dollar. At Marcus’s combined 37 percent effective marginal rate, that was roughly 11,800 in tax savings.

The kids each filed simple federal and California returns. Thanks to the standard deduction and limited additional income, they paid less than 1,000 combined in income tax. The net first year family savings was close to 10,800 on wages they had effectively already been earning informally. Marcus paid KDA about 3,500 in advisory and implementation fees, leaving a first year ROI of more than three to one, with systems now in place for future years.

Ready to see how we can help you Explore more success stories on our case studies page to discover proven strategies that have saved our clients thousands in taxes.

Step by Step Checklist to Implement This Strategy Correctly

If you want the hire your kids approach to stand up under IRS and California scrutiny, you cannot treat it as a casual bookkeeping move. You need a real employment structure. Here is a practical checklist.

Step 1 Define Real Job Duties

Start by listing tasks your child can reasonably perform for the business, such as:

• Social media posts, basic video shooting, or editing.
• Scanning and organizing paperwork.
• Simple bookkeeping data entry under supervision.
• Cleaning the office or maintaining equipment.
• Packaging and shipping products if you run an ecommerce operation.

The work must benefit the business and be appropriate for the child’s age. A 10 year old stuffing envelopes is reasonable. A 10 year old serving as chief financial officer is not.

Step 2 Set a Reasonable Wage

The IRS requires wages to be reasonable for the work performed. A good rule of thumb is to look at what you would pay a non family minor for similar work in your area. For example, if a local teen social media assistant would earn 18 per hour, that is a defensible rate for your 16 year old handling your accounts.

Red Flag Alert If you pay your 12 year old 80 per hour to take out the office trash, you are inviting the IRS to disallow a large part of the deduction. In an audit, agents are trained to ask what the child did, how many hours they worked, and how you set the wage. Keep a written justification in your files.

Step 3 Put Them on Payroll and Track Hours

Your child should complete the same new hire paperwork any other employee would, including Form W 4 for federal withholding and state equivalents. Then:

• Obtain a Social Security number if they do not already have one.
• Set them up in your payroll system with an hourly rate.
• Have them track their time each shift with a time sheet or app.
• Run regular payroll with pay stubs and direct deposit or checks.

Pro Tip Want to see how shifting wages to your kids will affect your overall business profit Estimate the change with this small business tax calculator before you implement.

Step 4 Comply with California Labor Rules

In California, minors usually need a work permit issued through their school. You also must observe hour limitations, meal and rest break rules, and minimum wage requirements. For example, a 15 year old during the school year cannot work late into the night on weekdays, even in a family business.

Document the work permit, your wage rate analysis, schedules, and any communication with the school district. If the state or federal government ever questions your setup, having this paperwork lets you demonstrate you treated your child as a real employee.

Step 5 File the Returns Correctly

At year end you will issue each child a Form W 2 showing their total wages and any withholding. You will deduct those wages on your Schedule C if you are a sole proprietor or on the appropriate line of your business return if you operate as a partnership, S Corporation, or C Corporation.

Your child should file a federal income tax return using the standard deduction, and a California return, even if little or no tax is due. This closes the loop and proves the wages were treated as taxable income to them, which supports your deduction.

Where Business Owners Get This Wrong

Every piece of this hire your kids tax strategy California entrepreneurs talk about can work in your favor. Where people get into trouble is in the details. Here are the common pitfalls.

Paying Without Documentation

Many parents say their kids help in the business but never actually move money into the child’s name. They might buy the child clothes, pay for trips, or cover sports fees and call it compensation. That does not work. The IRS expects wages to be paid in cash, check, or direct deposit and reported on a W 2.

Without payroll records and W 2s, an auditor can simply reclassify those payments as nondeductible personal expenses.

Using the Wrong Entity Type

If your only goal is to hire your minor children, a sole proprietorship or a partnership owned solely by you and your spouse can be more efficient than an S Corporation or C Corporation. That is because of the FICA and FUTA exemptions for child employees of unincorporated family businesses outlined in IRS Publication 15.

However, many owners already have S Corporations for other tax reasons. In those cases, we sometimes design a structure where an unincorporated division handles kid wages while the main S Corporation continues to own the core business activity. This is highly fact specific and belongs in a custom plan.

Ignoring California Compliance

California’s Labor Commissioner takes child labor violations seriously. Even if the IRS is satisfied, the state can still impose penalties if you skipped work permits, violated hour rules, or underpaid minimum wage. That risk is higher in industries that the state monitors closely, such as restaurants, construction, and retail.

Bottom line Treat your child like any other employee from a compliance standpoint. If you would document it for a stranger, document it for your own kid.

Will Hiring My Kids Trigger an IRS Audit

Many business owners worry that putting their children on payroll will somehow flash a red light at the IRS. There is no special audit code that automatically flags returns with child employees. What matters is whether the wages look reasonable and whether the documentation is in order.

Here is what an auditor is likely to look at if your return is examined:

• Age of the child when the wages were paid.
• Nature of the work described.
• Total hours and pay rate compared to industry norms.
• Presence of time sheets, pay stubs, W 2s, and bank records.
• Whether the child filed their own returns reporting the income.

If all of that lines up, hiring your kids usually looks like smart planning, not a red flag.

Frequently Asked Questions About Hiring Your Children

How Young Is Too Young to Put a Child on Payroll

The IRS does not set a minimum age in the tax code. Instead, they focus on whether the work is legitimate and appropriate for the child’s age. A 7 year old can reasonably appear in marketing photos for a family business or stuff envelopes a few hours per week. A 7 year old cannot reasonably manage contracts or sales.

California labor rules add another layer, so when in doubt, confirm that the tasks and hours you are assigning comply with both state law and common sense.

Can I Pay My Child Through a 1099 Instead of W 2

Generally, no. In almost every case your child will be your employee, not an independent contractor. You control their schedule, provide the tools, and they work only for you. Treating them as contractors to avoid payroll filings is likely to cause more problems than it solves, especially under California’s strict worker classification rules.

What Can My Child Do With the Money

Once wages are legitimately paid and deposited into an account in your child’s name, you can help them use that money strategically. Common moves include:

• Funding a Roth IRA for your child, which can grow tax free for decades.
• Setting aside money for college expenses.
• Letting them cover discretionary spending so they learn budgeting.

The key is that the money truly belongs to the child, not just shuffled around in your own accounts.

Does This Work for High Income Families

Yes. In fact, the higher your combined federal and California tax rate, the more powerful this strategy becomes. A high net worth family paying 45 percent combined tax on the last dollars they earn stands to save more each time they shift income to a child in a very low bracket.

Is There a Maximum I Can Pay My Child

There is no single fixed cap in the tax code, but the wage must be reasonable for the services performed. For most small businesses, paying a teenager 8,000 to 18,000 per year for part time work is within a defensible range. Paying 60,000 for low skill work at 10 hours per week would be very hard to justify.

Bottom Line and Next Steps

Hiring your children into the family business is not a loophole. It is a long standing set of rules in the Internal Revenue Code and the California tax system that reward families who involve their kids in real, documented work. When executed correctly, the hire your kids tax strategy California residents can use turns education, responsibility, and cash flow into a coordinated plan.

This information is current as of 5/27/2026. Tax laws change frequently. Verify updates with the IRS or California Franchise Tax Board if you are reading this later, and review current guidance in resources like IRS Publication 15, IRS Publication 929, and relevant California labor rules.

Book Your Tax Strategy Session

If you are a California business owner wondering how much you could save by legitimately putting your kids on payroll, you should not guess. Our team will review your entity structure, run detailed projections, and build a compliant hiring plan tailored to your family. Click here to book your consultation now.