I pay my 11-year-old daughter Dylan $1,000 a month from my real estate business.
She earns it. She does real work. The IRS considers it a legitimate business deduction. We pay no FICA on her wages. She pays no federal income tax on the income. And the dollars she earns fund a Roth IRA that will compound tax-free for the rest of her life.
This isn't a loophole. It's a specific provision of the tax code (IRC §3121(b)(3)(A)) that's been there for decades. Most parents who own businesses just don't use it because the setup feels intimidating.
The annual upside if you do this right: tens of thousands of dollars in deductions, FICA savings for you, and tax-free retirement compounding for your kids. The annual cost if you do it wrong: a failed audit, back taxes, and penalties.
This article walks through how to do it right. Not legal advice (talk to your CPA before you implement, more on that at the end), but a practitioner-level walkthrough of the strategy as I use it in my own family.
What the tax code actually says
The relevant provision is IRC §3121(b)(3)(A). Plain-English version:
If your business is a sole proprietorship, a single-member LLC taxed as a sole proprietorship, or a partnership where both partners are the parents of the child, then wages paid to your child under age 18 are exempt from FICA (Social Security and Medicare) and FUTA (federal unemployment tax).
The standard deduction does the rest of the work. Earned income up to the federal standard deduction threshold is exempt from federal income tax for the child. For the 2025 tax year that's around $15,000 (my year-end planning materials cite $15,750, which may reflect a more recent inflation adjustment, your CPA will have the current number).
Net effect: you can pay your child up to roughly the standard deduction amount per year, deduct it as a business expense, your child pays zero federal income tax on it, and you pay no FICA or FUTA on the wages.
The critical limitation most articles skip
The FICA and FUTA exemption only applies if your business is a sole prop or a husband-wife partnership where the parents are the only partners.
If your real estate business is structured as an S-corp, a C-corp, or an LLC taxed as either, you do NOT get the FICA/FUTA exemption. Your kid still benefits from the standard deduction on the income side, but you're now also paying employer-side FICA on their wages, which changes the math significantly.
This is why entity structure matters and why this strategy works best for property-owning sole props and husband-wife LLCs, which describes a large share of small-portfolio real estate investors. It's one of several moves I cover in the year-end tax playbook that saves investors the most, where shifting income to a kid's zero bracket sits alongside cost segregation and Real Estate Professional Status.
If your structure doesn't qualify, you have two options. Talk to a CPA about whether restructuring the property-holding entity is worth the long-term savings (often it is). Or accept the smaller benefit and run the strategy through your existing structure for the standard-deduction tax-free income piece, even without the FICA exemption.
Either way, getting the entity structure right is step zero, before you write a single paycheck.
How we actually do it with Dylan
Here's what this looks like with our 11-year-old.
Dylan earns $1,000 a month from our real estate business. That's $12,000 a year, well under the standard deduction, so she pays no federal income tax on it.
The work she does is real and documented. She helps with due diligence on out-of-state properties by walking neighborhoods on Google Earth, taking notes on what she sees, and detailing the good and the bad. She helps mail our 1099s at year-end. She participates in our annual member meetings (yes, kids can attend and contribute, with appropriate guidance).
What we do with her earnings:
- A portion goes into her Roth IRA. Earned income is what makes Roth contributions possible. The 2025 Roth contribution limit for a child is the lesser of their earned income or $7,000. Money in there compounds tax-free for the rest of her life.
- The remainder goes into a custodial Vanguard account that she'll control at the age of majority for our state.
The compounding math is staggering. $7,000 contributed to a Roth at age 11, growing at a hypothetical 8 percent annually with no further contributions, becomes roughly $400,000 by age 65. That's just from one year's contribution. We do this every year. By the time she's 18, she'll have a six-figure investment account, a real understanding of how money works, and decades of tax-free retirement money already growing.
Age-appropriate jobs that hold up under audit
The most common way this strategy gets attacked in an audit is the IRS questioning whether the work is legitimate. The fix is straightforward: only pay your kids for work they're actually capable of doing, at a reasonable wage for that work.
What works for younger kids (8 to 12):
- Modeling for marketing materials (rental property listings, social media)
- Filing and scanning physical documents
- Light office work like envelope stuffing, organizing files, mailing 1099s
- Simple data entry on properties
- Walking properties on Google Earth and taking notes
- Cleaning common areas (if age-appropriate and legal in your state)
What works for older kids (13 to 17):
- Bookkeeping support and data entry into accounting software
- Social media content creation for listings or your investor brand
- Property research and competitive market analysis
- Tenant communication drafts (with adult oversight)
- Photography and listing prep
- Software development if they have the skill
What doesn't work:
- Vague "general help" with no documented tasks
- Paying a 5-year-old $1,000 a month (the IRS will see this as a sham)
- No timesheets, no documented work product, no records
- Paying a kid who was on vacation the entire pay period
- A wage that doesn't match the work (a 10-year-old at $200 an hour for "marketing help" is going to fail)
The pay rate has to be reasonable for the work. A useful test: would I pay an unrelated adult freelancer this same rate to do this same task? If the answer is yes, you're probably defensible. If the answer is no, dial it down.
The compliance side
This is where most investors give up before they start, because the compliance feels overwhelming. It doesn't have to be.
What you need to set up:
- An EIN for the property-owning entity if you don't have one already.
- A W-4 signed by the child (or by you on their behalf for very young kids).
- A Form I-9 to verify employment eligibility.
- Payroll records documenting hours worked, work performed, and wages paid.
- A real bank account or custodial account in the child's name where the wages actually land.
- A W-2 issued at year-end documenting the wages.
- State-level employment paperwork, which varies by state. Some states require work permits for minors below certain ages.
Kids Payroll handles the compliance side for parents who want the full system without piecing it together themselves. Time tracking, payroll calculations, year-end W-2 generation, the documentation an audit would require, all in one place. Built specifically for this strategy.
You can also do this manually with a spreadsheet and a willingness to read your state's child employment rules. The system you choose matters less than actually having a system. The IRS doesn't care whether your records came from an app or a spreadsheet. They care that the records exist, that they're consistent, and that they line up with the wages you deducted.
What to do with the money
Once the wages are paid, the next decision is what the money does for the kid. Here's how we think about it.
The Roth IRA pipeline comes first. Roth contribution room is use-it-or-lose-it. Every year you don't contribute is a year of tax-free compounding you'll never get back. Fund it up to the contribution limit (or your child's earned income, whichever is less) before anything else.
A custodial Vanguard or Schwab account for the remainder. A simple total stock market index fund or a target date fund works. You're not trying to optimize. You're trying to teach the kid that money compounds when invested and to transfer the asset to them at the age of majority.
A small amount in a checking account they can actually spend. This is the pedagogical part. They need to feel what it means to earn money, save money, and choose how to spend it. Dylan has a small portion of her earnings on a debit card she controls. She buys her own things. She thinks twice about purchases because it came from her work, not from us.
The combination of tax-free retirement money, invested custodial money, and spending money they earned themselves teaches a kid more about how money actually works than 12 years of school will. It's a big part of why we eventually chose to fold this into our first year of homeschooling, where real business work became its own kind of curriculum.
Talk to your CPA before you implement
Tax law changes. State rules differ. Your specific entity structure determines what's actually possible. Everything I've described here is based on current federal law and my family's setup, which won't be identical to yours.
Before you implement, talk to a CPA who has actually done this with their own clients, not just read about it in a textbook. Get the entity structure right. Get the documentation right. Get the payroll system right. The 2025 Roth contribution limit, the standard deduction figure, and the FICA/FUTA exemption rules can all change and the IRS routinely audits family employment arrangements that are sloppy.
A one-hour conversation with the right CPA pays for itself the first year you do this correctly.
What this doesn't work for
A few honest disqualifiers.
Your business isn't structured to qualify for the FICA exemption. If you're operating as an S-corp or C-corp, the math is meaningfully worse. You can still pay your kids and they still benefit from the standard deduction, but you'll pay employer-side FICA. Talk to a CPA about whether restructuring the property-holding entity is worth it, or whether to run the strategy through a different qualifying entity if you have one.
Your kid is too young to do legitimate work. A 4-year-old cannot actually contribute to your business in a way the IRS will accept. Wait until they're old enough to do something real and document it.
You're not willing to do the paperwork. This is a documented, audit-ready strategy. It requires real records. If you're not going to keep timesheets and issue W-2s, don't try it. The alternative (paying the kid in cash with no documentation and trying to deduct it) is exactly the kind of thing that triggers an audit and costs you more than you saved.
You don't actually want your kid working in the business. Some kids genuinely aren't interested. Forcing it doesn't work. The strategy depends on real work being done willingly.
Your business doesn't actually generate enough income to justify the deduction. If the property-owning entity is breaking even or losing money on paper, you don't need more deductions. The deduction is only valuable when you have income to offset.
The question worth asking
If you own a real estate business and you have kids, you're sitting on one of the most efficient wealth transfers the tax code permits. It pairs naturally with other family-level moves hiding inside what you already do, like renting your home to your business under the Augusta Rule. Most parents don't use any of it because the compliance feels like a hassle. The compliance is a few hours of setup once and a few hours of maintenance per year.
In exchange you get tens of thousands of dollars in business deductions. You get FICA savings on every dollar of those wages. You get tax-free Roth compounding for your kids that quietly turns into six and seven figures by the time they're adults. And your kids learn what a paycheck feels like before they ever learn what a 9-to-5 feels like.
The question worth sitting with: what would your kids' lives look like if they hit 18 with a six-figure investment account, a fully funded Roth IRA, and a working understanding of business and money?
For us, that's the entire point. The tax savings are nice. The dollars compounding into Dylan's Roth are nicer. But the most valuable part of this strategy is what it teaches her about how money actually works, while the standard deduction and IRC §3121 do their quiet work in the background.
