Ever wish you could turn your kids’ allowance into an investment for their future? Believe it or not, you can, and you can get a tax break while you’re at it.
Paying your children for legitimate work in your family-owned business is one of the best-kept strategies for both reducing your taxable income and teaching your kids real-world responsibility. It’s an especially powerful move for hospitality business owners who want to keep business in the family, build generational wealth, and make every tax dollar work smarter.
Paying Your Kids the Right Way
Here’s the key: your kids must actually work for your business and the work must be reasonable for their age. That means you can’t just write them a paycheck for fun, but you can pay them for doing real jobs such as:
Helping with social media posts or taking photos for your restaurant.
Filing receipts, running reports, or light bookkeeping tasks.
Organizing inventory or assisting with simple administrative work.
It’s all about choosing age-appropriate, legitimate tasks that add value to your business. When determining how much to pay, think in terms of fair market rate. Check job boards like Indeed or Glassdoor for going rates, save screenshots, and keep records to support your numbers if you’re ever questioned. Documentation is your best friend here.
A Quick Note for S Corps
If your hospitality business is taxed as an S corporation, you can still hire your kids, but their wages are generally treated like any other employee wages for payroll tax purposes. This means things like Social Security and Medicare taxes apply, but their pay is still a deductible business expense and still shifts income from your higher bracket to their lower one. Their earned income from the S corp can also be used to fund a custodial Roth IRA, as long as the work is real and the pay is reasonable, so the long-term wealth-building strategy still works.
The Power of “Rothing It Up”
Once your kids earn income through legitimate work, you can take things a step further by contributing those earnings to a custodial Roth IRA.
Here’s where the magic happens:
Kids’ earnings count as earned income, so they’re eligible for a Roth IRA.
Their tax rate is likely zero.
You pay the tax now (which is basically nothing at their rate), and then their contributions grow tax-free, forever.
Imagine this: you pay your child $10,000 for their work in the family business. You contribute that amount to a custodial Roth IRA. With conservative market growth, the money could double roughly every eight years. By the time your child reaches retirement age, that $10,000 could become over $1 million, all tax-free.
They can also withdraw their contributions (not the growth) anytime, penalty-free, if they need help with a down payment, college costs, or other major life moments. It’s an incredible way to give them a financial head start.
Keeping It Legal and Defensible
The IRS doesn’t publish a list of what tasks are acceptable at each age. What matters is that your arrangement is reasonable and defensible. Have a job description, track their hours, document the work, and keep proof that pay matches what someone else might earn for similar tasks.
If you ever need to defend it, your tax preparer can support the accounting side, but it’s also wise to have a tax attorney familiar with small business structures. Keeping good records makes everything clean and compliant.
Making It Work for Your Business and Family
If you own a hospitality business and have kids under 18, paying them for real work is a fantastic opportunity to shift money from your business’s taxable income into your family’s hands, all while setting your children up for long-term success.
At Specialized Accounting, we’ve guided many hospitality business owners through this strategy to legally lower their tax burden and start building generational wealth. Setting up a custodial Roth IRA is simple and takes just a few minutes. If you’d like help structuring this correctly or exploring how it fits into your broader tax plan, reach out to our team anytime at hello@specializedat.com.