Our daughter Dylan is 11, and she's been on payroll since she was 5. She does real work for our businesses, keeps her own work log, files no tax return, owes no tax, and has a Roth IRA compounding for what will probably be 60+ years. Our toddler Ryker isn't on payroll yet, and the reason is the entire test in one sentence: he's not at the point where he can follow directions.
Paying your kids is one of the most legitimate, most underused strategies available to business-owning families, and it's also one of the easiest to do sloppily. Here's exactly how we run it. If you want the full legal backbone of the strategy, we cover the tax-code side in detail in how to pay your kids from your real estate business.
The Core Math
When you pay your child from your business, three things happen at once, which is why I call it a triple benefit:
- Your business deducts the wages. Income that would have been taxed at your rate becomes a business expense.
- Your child pays nothing on earnings up to the standard deduction, because at that income level they have no tax liability and don't even file. For 2026 that ceiling is $16,100 (it was $15,750 in 2025; it adjusts annually).
- The money stays in your family, now sitting in your child's name instead of on your tax return.
You've shifted income from your bracket to a zero bracket without a dollar leaving the household. And depending on how your entity is structured, wages paid to your own minor children can also be exempt from FICA taxes, which is a meaningful extra layer. The entity type determines this, so set the structure up with your CPA.
The Rules That Keep It Clean
The IRS is fine with this strategy. What it's not fine with is fiction. The whole system rests on the work being real and the paper trail proving it.
Real work, realistic wage. Dylan earns $14.70 an hour, which is Arizona's minimum wage, on purpose. Not $100 an hour for "modeling" (the audit-bait classic), and not $2 an hour either. Peg the wage to what the work would cost you from a stranger, and your state's minimum wage is a defensible floor. Kids can genuinely do a lot in a real estate or online business: photos, filing, data entry, content help, cleaning between guests, stuffing packets.
A log the kid keeps. Dylan logs her own work: the date, the hours, and a description of what she did. That's the audit file. It also happens to be a management lesson, because a kid who logs her own hours understands the deal: no log, no paycheck. We used to run this on a Google Doc; instead, we built it into software, and we share it free at kidspayroll.com.
W-2, not 1099. We pay Dylan as a W-2 employee. The W-2 establishes clean earned income, which is what qualifies her for the Roth IRA, and treating your own child as a 1099 contractor creates complications you don't want. Payroll formalities feel like overkill for a kid until you remember the entire strategy is the formalities.
Age matters, capability matters more. We started Dylan at 5, when she could reliably follow directions and complete tasks. Ryker will get there. A payroll entry for a child who cannot plausibly do the work is how this strategy blows up in an audit.
The Roth IRA Stack
Earned income is the key that unlocks a Roth IRA, and this is where the strategy goes from "nice deduction" to generational. For 2026, the IRA contribution limit is $7,500. A chunk of Dylan's earnings goes into her Roth every year, where it will grow tax free for life.
Run the compounding on a few thousand dollars a year invested from age 5 and you'll understand why I get animated about this. She will hit adulthood with a funded retirement account before her first full-time job, built from income that was deductible to our business and tax free to her. If you want to see how quickly invested dollars turn into real monthly income, the math in how much you need to retire early is the same engine working in her favor for six decades.
Beyond the Paycheck
Two structural details from how we run it. Our kids are not owners of our businesses; they sit on the board of directors of our entities, they have their own bank accounts, and our LLCs carry a succession plan (paired with our estate planning) that eventually turns the businesses over to them. Payroll is step one of a much longer arc: they're learning that money comes from work, that work gets documented, and that ownership is the destination. If you don't have that succession piece in place yet, what happens to your rentals if something happens to you is the companion conversation.
And a timing note if you're reading this near year-end: winter break is real work season. Kids can put in documented hours over the holidays and still be paid inside the current tax year, which makes this one of the few tax moves you can still execute in December. It pairs well with the other year-end tax moves that have to happen before December 31.
If you want the system without building it yourself (wage tracking, work logs, documentation that holds up), that's Kids Payroll: $19/month for up to 2 kids ($5/month per additional child), or $190/year for up to 2 kids ($50/year per additional child).
FAQ
Q: How much can I pay my child tax free in 2026? A: Up to the standard deduction, which is $16,100 for 2026. At or below that earned income level, a child with no other income owes no federal income tax and generally doesn't file a return. The figure adjusts annually.
Q: What age can I start paying my child from my business? A: There's no statutory minimum age; the practical test is whether the child can genuinely perform documented work. We started ours at 5. The work, the wage, and the log all have to survive scrutiny, so capability is the real threshold.
Q: Should I pay my child by W-2 or 1099? A: W-2. It establishes clean earned income for the Roth IRA, avoids contractor complications, and fits the reality that your child works under your direction. Whether the wages are also FICA-exempt depends on your entity structure, so confirm with your CPA.
Q: Can a child have a Roth IRA? A: Yes, as long as they have earned income. Contributions are capped at the lesser of their earned income or the annual IRA limit ($7,500 for 2026). Decades of tax-free compounding make this arguably the single most powerful account a child can own.
I'm not a CPA, and this isn't tax advice. Entity structure determines the FICA treatment, and the documentation standards are real, so set this up with a tax professional.
