How a Family Business Funded Two Roth IRAs by Putting the Kids on Payroll
Sam's List Editorial | 2026-06-23
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 vetted 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...
