Is Hiring Your Underage Teenager in your Sole Prop or Disregarded LLC Smart?

It is.... Family Tax Savings for 2025

If you own a sole proprietorship or a single-member LLC taxed as a disregarded entity, hiring your underage child may be one of the smartest financial strategies you can implement in 2025. Not only does it promote good work habits and give your child valuable experience, but it can also unlock significant family-wide tax savings—completely within the bounds of IRS rules.

Understanding the Tax Breaks

Payroll Taxes: Major Exemptions for Family Businesses

Here’s where the magic happens: If your business is a sole proprietorship or a single-member LLC taxed as a disregarded entity—and you hire your own child under the age of 18—wages you pay them are exempt from Social Security and Medicare (“payroll”) taxes. These taxes total 15.3% of wages, so the savings add up fast.

For 2025, this means that if you pay your 16-year-old $12,000 in legitimate business wages, you save $1,836 in payroll taxes alone.

But there’s more:

• FUTA (Federal Unemployment Tax Act) taxes also don’t apply to wages paid to your child under age 21 in a sole proprietorship or qualified LLC.

• If your business is taxed as a partnership between you and your spouse—same deal: payroll tax exemptions apply to your under-18 kids.

Note: If your business is an S corporation or C corporation, these exemptions do NOT apply. Wages paid to your child must have all payroll taxes withheld, just like with any non-family employee.

Income Tax Benefits: Shift Income, Slash Your Taxes

The 2025 standard deduction for single filers is $15,000. That means your minor child can earn up to $15,000 without owing federal income tax if their earned income doesn’t exceed the threshold.

Here’s how this works for your family:

1. Business Deduction for You: The wages you pay are a business expense, fully deductible against your business income.

2. Tax-Free Income for Your Child: If you keep their annual wages at or below $15,000, they’ll owe nothing in federal income taxes.

3. Income Shifting: You’re effectively moving income out of your higher tax bracket (possibly as high as 37%) and into your child’s zero percent bracket—which is totally legal and encouraged by the tax code.

Example:

Suppose Marty the bakery owner pays his 15-year-old daughter $10,000 to help with packaging, social media, and inventory tracking. Marty deducts the $10,000 from his business (saving $3,700 in income taxes if he’s in the 37% bracket) and his daughter pays no federal income tax.

What Work Can Kids Actually Do?

The IRS expects the work to be both legitimate and reasonable for the child’s age and abilities. You must have:

• Real, necessary services performed for your business

• Detailed documentation—think timesheets, job descriptions, pay records

Great examples of work for teenagers include:

• Office cleaning or organizing inventory

• Managing or posting to your business’s social media handles

• Simple bookkeeping or data entry

• Assisting with marketing campaigns or mailings

• Running business-related errands

• Helping at company events

Prohibited work: Tasks that are dangerous, violate child labor laws, or have no real connection to your business.

Documentation That Keeps the IRS Happy

Nothing sinks a good tax strategy faster than lousy recordkeeping. Here’s what you should do:

• Write a job description for your child’s position

• Track hours worked, duties performed, and pay

• Issue regular paychecks, just like you would for any employee

• If you want to go the extra mile: Set up direct deposit into a separate bank account in your child’s name

Retain all payroll records, timecards, and any employment contracts for at least three years.

The “Family CFO” Strategy: Go Beyond Wages

Why stop at tax-free wages? Once your child has earned income, they become eligible to contribute to retirement accounts like a Roth IRA. For 2025, the contribution limit is up to $7,000 or the amount of their earned income, whichever is less. If you pay them less then there is a better option than a ROTH IRA.

Here’s something a lot of people don’t know: your teen can also start building wealth with a dividend-paying whole life insurance policy. If your child puts aside some of their earnings into one of these policies, it can grow cash value over time—and provide tax-free income down the road by borrowing against the policy with no intent to ever pay it back and it's how the wealthy live tax free in retirement. It’s not just for the ultra-wealthy though. Pairing this with a Roth IRA can really supercharge your teen’s head start on financial independence!

A $7,000 Roth IRA contribution made annually from ages 14–18 could easily grow to six figures by your child’s retirement age—and it’s coming from money that was tax-deductible for your business. Even better: Layer in a cash value life insurance policy for that extra boost of long-term, tax-advantaged savings potential.

Real-World Savings: Example Scenarios

Example 1: Family Landscaping Business

• 17-year-old son works summers and weekends mowing lawns, maintaining equipment, and managing the business website.

• Earns $14,000 in 2025; parents deduct his wage as a business expense.

• No payroll taxes, FUTA, or federal income tax for the son.

Example 2: Ecommerce Side Hustle

• 15-year-old daughter helps with product descriptions, packaging, updating inventory, and creating TikTok promos.

• Earns $8,500 in 2025 and contributes $5,000 to a Roth IRA or a whole life dividend paying policy.

• Parents reduce business income and tax liability; daughter starts building retirement savings—tax-free.

Compliance Basics: Stay on the Right Side of the Law

• Fair Labor Standards Act (FLSA) compliance: Pay at least minimum wage for your area, and don’t schedule work during school hours.

• Follow local child labor laws: States may have their own employment rules for minors—check these before hiring your teenager.

• Reasonable wages: Pay your kids what you’d pay a non-related part-time employee. If in doubt, research market rates or ask your accountant.

Find more compliance tips on our tax strategies blog.

Why Families Should Take Advantage—But Act Carefully

This isn’t just a loophole for rich business owners—it’s a practical family finance move that’s been in the tax code for decades. You’ll save on taxes, keep money in the family, and teach your kids real-world job skills.

At the same time, documentation and fairness matter. Don’t run afoul of the IRS by inflating wages or writing a job description for “occasional Instagram likes.” If you do it right, this can be one of the most powerful, completely legal tools for reducing family tax burden each year.

Want more strategies like this? Check out our other articles at BlackFin Wealth Group’s tax strategies blog or get in touch with us to discuss custom solutions for your business and family!

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