How a Family Business Funded Two Roth IRAs by Putting the Kids on Payroll

How a Family Business Funded Two Roth IRAs by Putting the Kids on Payroll

Here is one of the only moves in the tax code where the same dollar can be deducted by you and taxed at almost nothing for somebody else. This hiring kids family business case study walks through exactly how a sole proprietor did it — and turned two teenagers into Roth IRA owners before either of them could legally rent a car.

Quick flag before we start: this is an illustrative composite for education. The names and numbers are a representative scenario built to show the mechanics, not an audited client result. Your mileage depends on your facts.

The setup behind this hiring kids family business case study

Call him Marcus. He runs a one-person marketing shop as a sole proprietorship, nets around $220,000 a year, and pays tax on most of it at the 32% federal bracket. He has two teenagers, 15 and 17, who were already doing real work for him — shooting photos, sorting client files, running the inbox — for free.

Marcus wanted two things that felt unrelated. He wanted his kids to understand that money comes from work, not from him. And he wanted to stop writing checks to the IRS that made him wince.

The thing nobody had told him: those two goals are the same move.

Why paying your own kids beats almost every other deduction

When a parent who operates as a sole proprietorship (or a partnership where both partners are the child's parents) hires their own child under 18, the wages are exempt from Social Security and Medicare tax — that is IRC §3121(b)(3)(A). No FUTA either, until the child turns 21, under §3306(c)(5).

So the money skips the 15.3% payroll-tax bite that hits almost every other dollar of earned income.

It gets better on the income-tax side. A child with only earned income owes zero federal income tax up to the standard deduction — $15,750 for a single filer in 2025, rising to $16,100 in 2026. So the first chunk of wages is taxed at zero to the kid.

And the deduction lands on Marcus's return at his 32% rate. Here's the pattern: he moves income out of his top bracket and into his kids' near-zero one, and Washington skips its payroll cut on the way through. That's not a loophole. It's the code working as written for family businesses.

The math on moving $15,000 to a teenager

Say Marcus pays each kid $15,000 for the year — under the standard deduction, so neither owes federal income tax on it.

That's $30,000 of business income he no longer reports himself. At a 32% federal bracket, the deduction is worth about $9,600 in federal tax he doesn't pay. Because it's a sole prop, those wages also reduce his self-employment income, so he dodges roughly another 2.9% Medicare-portion hit on that amount — call it another ~$870. And the kids' wages skipped FICA entirely.

Same work that used to happen for free. Now it shelters close to $10,000 a year and the kids actually get paid.

Where the DIY hiring kids family business case study falls apart

This is exactly where people get themselves in trouble. They put a 9-year-old "consultant" on the books for $14,000 to file imaginary paperwork, no records, no real job. The IRS has won those cases for decades. The deduction has to be for real work at a reasonable wage, documented like any other employee — Treas. Reg. §1.162-7 governs whether compensation is reasonable and actually for services.

This is where Marcus brought in Good Operator, a firm that works with bootstrapped founders and family operators — the people building real businesses without a finance department behind them. They set up the structure so it would survive a question, not just look good in a spreadsheet.

What they put in place:

• Real job descriptions for each kid — photography and content production for the 17-year-old, file management and data entry for the 15-year-old — tied to work the business actually needed.
• Wages benchmarked to the market, so $15,000 mapped to a defensible hourly rate and a believable number of hours, not a round number pulled from thin air.
• Timesheets and actual payroll — W-2s, a written employment record, money paid into accounts in the kids' names. Not a Venmo note saying "allowance."
• A paper trail built to answer the only question that matters if the IRS asks: was this a real job at a fair wage? Yes, here's the file.

That last part is the whole game. The strategy is simple. The documentation is what makes it real.

The part that compounds for 50 years

Earned income unlocks the move that makes this story worth telling. A Roth IRA can be funded by anyone with earned income, up to the lesser of their wages or the annual limit — $7,000 in 2025, $7,500 in 2026.

Each kid now had a real W-2. So each kid could fund a Roth IRA.

Good Operator helped open one for each child and contributed up to the limit from their wages. The money goes in already taxed at roughly zero, grows tax-free, and comes out tax-free in retirement. A 15-year-old with decades of compounding ahead of them is the single best Roth account holder alive — time is the entire engine, and they have more of it than anyone.

Two teenagers. Two Roth IRAs. A father who cut his own tax bill funding them. And a lesson about work and money that landed harder than any lecture would have.

Find an accountant who builds the structure, not just the spreadsheet

The strategy in this hiring kids family business case study is not exotic. Plenty of owners have heard of it. The reason most never do it — or do it badly enough to get burned — is that the value is entirely in the execution: real jobs, reasonable wages, clean payroll, and a file that holds up.

That's the difference between a tax idea and a tax result.

Good Operator specializes in exactly this — accounting, tax, and fractional CFO work for bootstrapped founders and family businesses. Read their verified reviews on Sam's List, then book an intro call to see whether putting your kids on payroll is a fit for your business this year. The window for 2026 wages is open right now — but only if the paperwork is real before the work is done.