What to know about putting your kids on your payroll #marketwatch #personalfinance

Key Concepts

• Paying Children for Legitimate Business Work: The core concept of employing one's children for actual tasks within a business or rental property operation.
• Tax-Free Earnings Threshold: The amount a child can earn annually without owing federal income tax.
• Deductible Business Expense: The ability for a business owner to deduct the salaries paid to their children as a business expense, reducing taxable business income.
• Roth IRA: A retirement savings account that allows for tax-free growth and tax-free withdrawals in retirement.
• IRS Audit: An examination of tax returns by the Internal Revenue Service to verify accuracy.

Putting Children on the Payroll

The video discusses the strategy of employing one's children for legitimate business tasks as a method of financial planning and tax optimization. This approach is presented as a "win-win" scenario where children can earn income and the business owner can benefit from tax deductions.

How Paying Children Works

• Legitimate Business Activity: The fundamental requirement is that the children must be performing actual work for the business. This could be for a side hustle, a primary business, or even managing rental properties.
• Tax-Free Earnings Limit: In 2025, children can earn up to $15,000 annually without incurring any federal income tax liability. Any earnings exceeding this threshold would be subject to taxation.
• Business Expense Deduction: The salaries paid to the children can be deducted as a business expense by the parent's business. This reduces the overall taxable income of the business.

Example Scenario and Financial Benefits

The speaker illustrates this with a personal example:

• Hiring Children for Filming: The speaker plans to hire their children to film scenes for their content.
• Hourly Wage: A rate of $30 per hour is proposed. While seemingly high, it's presented as more cost-effective than hiring external professionals.
• Annual Earnings Calculation: If the children work five times per month at this rate, they would earn approximately $7,000 per year each.
• Roth IRA Contributions: This earned income can then be contributed to a Roth IRA for each child.
• Tax-Free Growth: Investments made within a Roth IRA grow tax-free.
• Long-Term Investment Growth: If these contributions are made consistently and grow at an average of 7% annually, each child could have nearly $200,000 invested by the age of 18.

Cautionary Note Regarding IRS Audits

A crucial point of caution is raised regarding the potential for IRS scrutiny:

• Audit Risk: The speaker expresses concern that if the business were to be audited, the arrangement of paying children might be viewed as "questionable" by the IRS.
• Importance of Legitimacy: This highlights the absolute necessity for the work performed by the children to be genuine and justifiable to avoid issues with tax authorities.

Conclusion

The strategy of putting children on the payroll offers significant financial advantages, including tax savings for the business and tax-advantaged savings for the children. However, it is imperative that the employment arrangement is legitimate and the work performed is real to mitigate the risk of an IRS audit. The potential for substantial long-term wealth accumulation through Roth IRA investments for children is a key benefit of this approach.